FEDERAL COURT OF AUSTRALIA

BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351

ORDERS

THE COURT ORDERS THAT:

1.    The proceedings against the third and fifth respondents be dismissed.

2.    The matter be listed for hearing of submissions on orders to give effect to these reasons, and on the question of costs, on a date to be fixed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INDEX

GLEESON J:

1    The applicants are four companies formerly associated with the families of Erwin and Emil Binetter, two brothers who came to Australia from Eastern Europe as refugees in 1950. Erwin and Emil Binetter are now both deceased.

2    After an extensive audit by the Australian Taxation Office (“ATO”) which commenced in about July 2006 (“tax audit”), the Commissioner of Taxation (“Commissioner”) issued notices of assessment, amended assessment and penalty assessment to the various applicants between December 2009 and July 2010 (“revised assessments”). In the case of the second applicant (“EGL” or “EGL Development”), the revised assessments go back as far as the year ended 30 June 1992. In order to issue revised assessments going back so far in time, the Commissioner was required to form the opinion that there had been fraud or evasion.

3    After several years disputing the revised assessments, the applicants went into liquidation. The joint and several liquidators of each of the applicants are John Sheahan and Ian Russell Lock (“liquidators”).

4    The liquidators claim that the applicants are entitled to the monetary relief from the respondents, quantified principally by reference to the tax liabilities arising from the revised assessments. Claims for relief are also made with respect to the costs of the winding up of the applicants and there are claims for ancillary relief in the nature of charging orders over various identified assets. The claims totalled over $120 million as at 27 September 2015.

5    In their opening submissions, the liquidators stated that the claims are primarily made on the basis of rights to equitable compensation.

6    The claims are pleaded in a second further amended statement of claim filed 7 September 2015 (“statement of claim”). In summary, claims are based on allegations of:

(1)    breach of fiduciary, common law, equitable and or statutory duties owed to the various applicants by various respondents who were directors of the applicants at various times; and

(2)    knowing participation by other respondents in the breaches of duty by the director respondents.

7    The alleged breaches by the director respondents concern the applicants’ dealings with two banks in Israel: the Bank Hapoalim in the case of the first applicant (“BCI” or “BCI Finances”) and the Israel Discount Bank (“IDB”) in the case of the other applicants.

8    The liquidators’ case is based on a complex analysis of the transactions between the applicants and the two Israeli banks, and on the factual context in which those transactions took place from 1988. In summary, the liquidators argue that the respondents participated in a scheme for the purpose of evading or avoiding liability to pay income tax. The alleged scheme involved, as an important element, using funds in Switzerland or Israel (sometimes referred to as “offshore deposits”) as security for advances from the Israeli banks of amounts equivalent to the offshore deposits. The liquidators contend that the respondents’ conduct in participating in the scheme led the applicants to incur the liabilities which arose when the revised assessments were issued. Those liabilities comprise income tax, penalties and interest incurred under the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”), the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) and the Taxation Administration Act 1953 (Cth) (“TAA”). In summary, the liabilities arose from the disallowance of deductions for interest expenses claimed to have been paid to the Israeli banks and the inclusion of amounts transferred from the Israeli banks to the applicants as part of the applicants’ assessable income.

The Commissioner’s proceedings?

9    Mr Williams SC, who appeared as senior counsel for the fourth, eighth and tenth respondents (“Andrew Binetter parties”) submitted that the proceedings should be characterised as the Commissioner’s proceeding. He noted that the common denominator in respect of the applicants is that all of them have outstanding tax assessments following the tax audit. Mr Williams SC also noted that the revised assessments had led to extensive litigation between the applicants and the Commissioner before both this Court and the Administrative Appeals Tribunal (“AAT”).

10    Mr Williams SC argued that the liquidators were appointed by or at the insistence of the Commissioner; the only creditor of the applicants (apart from related parties) is the Commissioner; the applicants are funded in this proceeding by the Commissioner; the applicants have been indemnified in respect of their costs (or a substantial part) in this proceeding by the Commissioner; the Commissioner has given an undertaking to the Court (by way of security for costs in respect of any adverse costs order); and the Commissioner has given security for the undertaking as to damages in relation to freezing orders made in the proceeding.

11    Mr Williams SC submitted that the Court should not be “distracted” by the “interposition” of the applicants or the liquidators between the Commissioner and these claims.

12    For their part, the liquidators emphasised that it was not necessary for them to show that the revised assessments by which the applicants incurred liabilities are correct. Their case was that the revised assessments are conclusive evidence of the due making of the assessments and that the amounts and particulars in the notices of assessment are relevantly correct: cf. ss 175 and 177 ITAA 1936.

Parties

Applicants

BCI

13    BCI was incorporated on 1 May 1992. Its registered office was at 883 Rawson Road, Rose Bay, New South Wales, the home address of Erwin and Margaret Binetter, from 17 October 1996. BCI’s principal place of business was at that address from 30 June 1994.

14    Erwin Binetter died on 25 August 2009. His widow, Margaret Binetter, in her capacity as legal personal representative of the late Erwin Binetter, is the second respondent. Margaret Binetter is also the third respondent. Erwin and Margaret Binetter are the parents of Andrew Binetter, the fourth respondent and Michael Binetter, the sixth respondent. They are also the parents of Ronald Binetter, who gave unchallenged affidavit evidence on behalf of the applicants. I accept Ronald Binetter’s evidence.

15    According to BCI’s amended appeal statement (“BCI’s tax appeal statement”) filed in Federal Court proceedings NSD 626 of 2011 (“BCI’s tax appeal”), at all material times BCI carried on business as a financier “on lending funds it obtained to other entities who used the funds for business purposes”.

16    BCI was:

(1)    placed in administration under the provisions of Pt 5.3A of the Corporations Act on 5 March 2014;

(2)    wound up by resolution of its creditors passed pursuant to s 439C of the Corporations Act on 23 April 2014; and

(3)    wound up by order of this Court made on 27 August 2014.

Directors of BCI

17    Erwin Binetter was a director of BCI from 4 May 1992 until his death on 25 August 2009.

18    Erwin’s brother, Emil Binetter was a director of BCI from 4 May 1992 to 22 November 2012. Emil Binetter died on 17 December 2014. His son, Gary Binetter, in his capacity as legal personal representative of the late Emil Binetter, is the first respondent. Gary Binetter is also the fifth respondent.

19    An ASIC search shows that Margaret Binetter, Andrew Binetter and Gary Binetter were also directors of BCI, from 25 January 1994. There is a minute of a meeting of the directors of BCI held on 25 January 1994, which records the consents to these appointments.

20    There is a document entitled “Authority for Operations” which identifies the signature of persons authorised to operate an ANZ Bank account in the name of BCI. The document refers to an authority form dated 17 May 1993. There is an undated letter signed by Erwin and Emil Binetter which is probably the authority form. That letter requests that ANZ open a Swiss franc currency account for BCI. It lists Michael, Erwin, Emil, Gary and Andrew Binetter as individuals authorised to arrange transfer of fund by telephone and/or facsimile and purports to attach a list of authorised signatories and specimen signatures. The letter identifies Michael Binetter’s title as “authorised person”, and Erwin, Emil, Gary and Andrew Binetter each as “director”. The “Authority for Operations” also identifies Erwin, Margaret, Gary and Andrew Binetter as holding the office of “director”, while Michael Binetter is said to hold the office of “authorised signatory”. Each of Erwin, Emil, Margaret, Andrew, Gary and Michael Binetter provided specimen signatures on the “Authority for Operations”.

21    Despite these documents, I do not find that Margaret, Andrew and Gary Binetter were directors of BCI prior to the date recorded on the ASIC search. In my view, it is more likely that the documents were prepared in anticipation of their subsequent appointment as directors.

22    The liquidators allege that Michael Binetter was a “de facto” or “shadow” director of BCI from no later than 20 May 1993. That is, the liquidators allege that Michael Binetter was not formally appointed as a director of BCI, but that he was a person who acted at all times in the position of a director of BCI and/or a person in accordance with whose instructions or wishes the other directors of BCI were accustomed to act within the definition of para (b) of “director” in s 9 of the Corporations Act.

23    Michael Binetter is or was a solicitor, specialising in commercial tax law. Having regard to his professional background, I infer that he deliberately accepted the role of “authorised person” in connection with BCI and sought to avoid being appointed or identified as a director of BCI.

24    Although they each held the role of director of BCI from January 1994, the evidence does not suggest that either Margaret or Gary Binetter played an active role in the management of BCI. As will appear below, Erwin, Emil, Andrew and Michael Binetter were actively involved in the management of BCI at various times.

Shareholders of BCI

25    At all relevant times, the shareholders of BCI were Erwin and Emil Binetter.

26    In the absence of any evidence to the contrary, I infer from the initial directorships and the shareholdings of BCI that Erwin and Emil Binetter caused the incorporation of BCI.

EGL

27    EGL was incorporated on 20 June 1975. Its registered office was at 883 Rawson Road, Rose Bay from 28 October 1996 to 14 October 2014.

28    According to the statement of facts, issues and contentions filed by EGL in AAT proceedings 1704 to 1709 of 2011 (“EGL’s SOFIC”), the business of EGL was that of a finance company. There is no evidence that the nature of its business changed over the period of relevance to this case.

29    The Andrew Binetter parties did not dispute that the sole activity of EGL, from December 1988, was to operate as an intermediary in relation to transactions with IDB.

30    EGL was wound up in insolvency by order of the Supreme Court of New South Wales (“Supreme Court”) on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

Directors of EGL

31    Emil Binetter was a director of EGL from 31 January 1990 to 28 September 2001.

32    Erwin Binetter was a director of EGL from 18 July 1975 until his death on 25 August 2009.

33    Again, there is ample evidence that Erwin and Emil Binetter were actively involved in the management of EGL.

34    Andrew Binetter was a director and secretary of EGL from 28 September 2001 until at least 20 April 2012. He was actively involved in the management of EGL from around the time of his appointment as a director of EGL.

35    Gary Binetter was a director of EGL from 16 October 1996 to 28 September 2001. As for BCI, the evidence does not suggest that Gary Binetter played an active role in the management of EGL.

36    Michael Binetter was a director of EGL from 16 October 1996 to 28 September 2001. Thereafter, the liquidators allege, he was a “de facto” or “shadow” director of EGL.

Shareholders of EGL

37    The shareholders of EGL were the seventh respondent (“Milgerd” or “Milgerd Nominees”) and the eighth respondent (“Erma” or “Erma Nominees”).

38    Milgerd is a combination of the names Emil and Gerda. At all relevant times, the shares in Milgerd were held by Emil Binetter and Gerda Binetter, Emil Binetter’s wife.

39    Erma is a combination of the names Erwin and Margaret. At all relevant times, the shareholders of Erma were Erwin Binetter (or his estate) and Margaret Binetter.

Ligon 268

40    The third applicant (“Ligon 268”) was incorporated on 22 April 1991. The company was incorporated, at the suggestion of Erwin Binetter, to be the trustee of the Bankstown Eye Trust. This trust was associated with Ronald Binetter, an ophthalmic surgeon. The paperwork for the incorporation of the company and the establishment of the trust, was arranged by Michael Binetter and presented to Ronald Binetter for signing.

41    In about 1998 or 1999, Ligon 268 expanded its activities to include lending funds to companies associated with Erwin Binetter.

42    The registered office of Ligon 268 was at 883 Rawson Road, Rose Bay from 16 July 1991 to 14 October 2014.

43    Ligon 268 was wound up in insolvency by order of the Supreme Court on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

44    Ligon 268 conducted the administration of Ronald Binetter’s medical practice. Ronald Binetter paid the costs incurred by Ligon 268 along with a 15% service fee. Ronald Binetter’s income came from his surgical practice and he was not a signatory on Ligon 268’s bank accounts. When his practice became successful, he lent money to Ligon 268 at the request of Erwin Binetter.

Directors of Ligon 268

45    Erwin Binetter became a director of Ligon 268 on 6 September 1991 and ceased to be a director on his death on 25 August 2009.

46    Andrew Binetter was a director and secretary of Ligon 268 from 30 June 1992.

47    Michael Binetter was a director of Ligon 268 from 5 July 1991 to 30 June 1992. Thereafter, the liquidators allege, he was a “de facto” or “shadow” director of Ligon 268.

48    Ronald Binetter was appointed as a director of Ligon 268 on 5 July 1991 and ceased to be a director on 27 March 1992, at his request.    

49    On the available evidence, the affairs of Ligon 268 were primarily managed by Erwin Binetter and Andrew Binetter at various times.

Shareholders of Ligon 268

50    The shareholders of Ligon 268 were Erwin Binetter and Michael Binetter, with Michael Binetter owning 9 of the 10 issued shares.

Binqld

51    The fourth applicant (“Binqld” or “Binqld Finances”) was incorporated on 12 March 2006. From incorporation until 12 December 2010, Binqld had its registered office at 883 New South Head Road, Rose Bay. This appears to be an alternate address for the home of Erwin and Margaret Binetter.

52    A file note of a meeting between Michael Binetter and Mark Douglass, lawyer, on 26 October 2007, records that Binqld was set up to “buy Emil’s shares on our side”.

53    However, in an affidavit affirmed by Andrew Binetter in AAT proceedings 275 to 277 of 2011 (“Binqld tax appeal”), Andrew Binetter stated that Binqld was “specifically set up for the purposes of borrowing money from IDB and then on-lending it to other entities for the purposes … outlined in” para 22 of his affidavit. Paragraph 22 states:

Therefore in the second half of 2005, the following were the funding needs of the Binetter entities:

(a)    Ligon 158 required funds to start the construction work on the Pagewood premises;

(b)    Ligon 158 and Ligon 237 required funds to increase their investment in the Nudie business;

(c)    Tamarama Fresh Juices needed to purchase equipment for the Nudie and Tamarama business;

(d)    Funds to be paid to Winmar, which was the nominee for a partnership of investors, to enable Winmar as nominee to pay up its obligations concerning the investment in an Investec fund in Australia. Ligon 158 was one of the partners in that partnership.

54     The Pagewood premises mentioned by Andrew Binetter were premises owned by Ligon 158 and located at Corish Circle, Pagewood. Those premises were destroyed by fire in May 2004. According to Andrew Binetter, records destroyed in the fire included records of EGL, Ligon 158, Erma and BCI.

55    The Nudie juice business (described in more detail below) operated from the Pagewood premises, as did the business of Tamarama Fresh Juices, which owned the equipment located at the premises and supplied product manufactured to the Nudie juice business’s specifications. Michael Binetter also maintained an office from which he practised as a solicitor at the Pagewood premises from 1997 to at least October 2007.

56    Andrew Binetter’s affidavit evidence demonstrates that a substantial purpose for the establishment of Binqld was to obtain funds from IDB, to fund and invest in the Nudie juice business.

57    In his affidavit, Andrew Binetter also stated:

At all times the only income-producing activity of Binqld was on-lending as referred to in this affidavit. The only receipt of Binqld was the interest payments received and any ancillary interest on bank accounts. The only assets of Binqld are the debts from on-borrowers of loans.

58    Binqld was wound up in insolvency by order of the Supreme Court on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

Directors of Binqld

59    Andrew Binetter was a director and secretary of Binqld from 12 April 2006. The available evidence shows that Binqld was principally managed by him.

60    The liquidators allege that, at all times, Michael Binetter was a “de facto” or “shadow” director of Binqld.

Shareholder of Binqld

61    At all times, Michael Binetter was the sole shareholder of Binqld.

Respondents

62    The roles of the first to sixth respondents as directors of the applicants are identified above.

63    Milgerd was incorporated on 4 November 1971. Emil Binetter was a director of Milgerd from 4 November 1971 until 22 November 2012. Gerda Binetter was a director from 4 November 1971 to 19 February 2003. Gary Binetter was a director of Milgerd from 18 January 1993. Milgerd appears to have been principally managed by Emil Binetter.

64    Erma was also incorporated on 4 November 1971. Erwin Binetter was a director of Erma from 4 November 1971 until his death. Margaret Binetter was also a director of Erma from 4 November 1971. Andrew Binetter was a director from 17 April 1996. The liquidators allege that Michael Binetter was a “shadow” director of Erma during an unspecified period. Both Erwin and Andrew Binetter participated in the management of Erma.

65    The ninth respondent (“Ligon 159”) was incorporated on 26 February 1988. Emil Binetter was a director of Ligon 159 from 9 May 1988 until 22 November 2012. Gerda and Gary Binetter were directors from 9 May 1988. As at January 2015, the shareholders of Ligon 159 were Gary Binetter, as well as his sisters, Debbie and Lisa Binetter. In the absence of evidence that Gerda or Gary Binetter participated actively in the management of Ligon 159, it is more likely than not that Ligon 159 was principally managed by Emil Binetter.

66    The tenth respondent (“Ligon 158”) was also incorporated on 26 February 1988. Erwin Binetter was a director of Ligon 158 from 6 July 1991 until his death. Margaret Binetter was also a director of Ligon 158 from 6 July 1991. Andrew Binetter was a director from 9 May 1988. As with Erma, the liquidators allege that Michael Binetter was a “shadow” director of Ligon 158 during an unspecified period.

67    The shareholders of Ligon 158, as at January 2015, were Erwin, Margaret, Andrew, Michael and Ronald Binetter, as well as Peter Binetter, the fourth son of Erwin and Margaret Binetter.

General observations concerning the respondents and their activities in Australia

68    The respondents were represented by four sets of lawyers. I will refer to Gary Binetter as legal personal representative of the late Emil Binetter, Gary Binetter in his own right, Milgerd and Ligon 159 as the “Gary Binetter parties”; Margaret Binetter as legal personal representative of the late Erwin Binetter and Margaret Binetter in her own right as the “Margaret Binetter parties” and Andrew Binetter, Erma and Ligon 158 as the “Andrew Binetter parties”. Michael Binetter was separately represented.

69    The respondents adduced no oral evidence in this proceeding, but the evidence tendered by the liquidators included affidavits made by Emil, Margaret, Andrew and Gary Binetter in tax appeal proceedings brought by the various applicants.

Erwin and Emil Binetter

70    All causes of action subsisting against each of Erwin and Emil Binetter have survived against their respective estates: Law Reform (Miscellaneous Provisions) Act 1944 (NSW), s 2(1).

71    According to an affidavit affirmed by Andrew Binetter, Erwin and Emil Binetter conducted a shoe manufacturing business at Marrickville, Sydney until around 1990. At some time, they commenced investing in property and property development. As appears below, by the time of BCI’s incorporation in 1992, the brothers appear to have amassed a portfolio of property investments which they valued in the several millions of dollars. Erwin and Emil Binetter engaged in numerous joint business ventures. Examples are the shoe manufacturing business, and the joint ownerships and directorships of BCI and EGL.

72    Gary Binetter gave evidence, in an affidavit affirmed on 20 December 2012 in tax appeal proceedings brought by Civic Finance Pty Ltd (in liquidation) and Advance Finances Pty Ltd (in liquidation), to the effect that, in about 1997, Emil and Erwin Binetter had decided to separate their business dealings. However, Emil and Gary Binetter continued to be directors of EGL until September 2001 and Erwin and Emil Binetter were directors of BCI until their respective deaths.

Erwin Binetter

73    Erwin Binetter died in August 2009 at the age of 85. By April 2004, he had been diagnosed with dementia according to medical reports which were in evidence. Ronald Binetter gave evidence of accompanying Erwin Binetter on a trip to Israel in 2003, during which he observed his father to be physically unwell and showing early signs of vascular dementia and memory loss. According to Ronald Binetter, Erwin Binetter told him that the purpose of the trip was to talk to the banks.

74    Ronald Binetter also gave an account of conversations with Erwin Binetter in around 2007 or 2008 in which Erwin Binetter said:

When Nudie is sold, there will be millions of dollars in profit and I will give you a percentage of my share.

75    Ronald Binetter’s evidence was that, based on these conversations, he trusted his father. I infer that Ronald Binetter did not consider that Erwin Binetter lacked mental capacity at the time of the conversations, to the point where Ronald Binetter did not place trust in him. Thus, although I accept that Erwin Binetter was diagnosed with dementia, I do not find that he lacked mental capacity to make decisions affecting various of the applicants at any point in time prior to his death.

Gary Binetter

76    Between 1986 and 2007, Gary Binetter was employed as a flight steward with Qantas Airways. ASIC searches show that he had an address in Double Bay, in Sydney, while he was a director of BCI and EGL. In more recent times, Gary Binetter has lived in Israel.

Michael Binetter

77    According to Ronald Binetter, Michael Binetter worked at law firms including Speed & Stracey, Andersen Legal, Kevin Munro & Associates and, as of 15 July 2015, operated his own law firm called Binettervale Lawyers. In more recent times, Michael Binetter has resided in New York.

The Nudie juice business

78    In May 1990, Erwin Binetter set up a company called Tamarama Fresh Juices Pty Ltd and appointed himself and Andrew Binetter as its directors. The company bought a business called Tamarama Fresh Juices, which operated from Marrickville. According to Andrew Binetter, Erwin Binetter arranged the funding to buy this business and, in about 1992, to buy out a competitor to increase the scale of the juice operation.

79    Between 1990 and 1993, the juice business tripled in size. To accommodate it, Erwin Binetter organised the purchase of the Pagewood premises. The premises were owned, at least by July 2003, by Ligon 158.

80    Andrew Binetter was appointed a director of Nudie Pty Ltd from about 31 October 2002. Ligon 158 is a shareholder in Nudie Pty Ltd, and also a shareholder in Nudie Foods Pty Ltd.

81    The Nudie brand was launched in January 2003. From July 2003, the Nudie juice business was carried out from the Pagewood premises.

82    In May 2004, Andrew Binetter was appointed a director of Nudie Foods Pty Ltd.

83    On 12 July 2004, Andrew Binetter was appointed a director of Nudie Foods Australia Pty Ltd. Andrew Binetter became the Chief Operating Officer of the Nudie juice business in October 2004, and the Chief Executive Officer in March 2005.

84    According to an affidavit affirmed by Andrew Binetter in the Binqld tax appeal, in 2005 Erwin Binetter expressed the view that “[w]e should take every opportunity to increase our interest in Nudie so that we can effectively control Nudie”. Thereafter, according to Andrew Binetter, steps were taken to achieve that end.

85    In this affidavit, Andrew Binetter recounted how he had described the Nudie juice business to IDB bank officers in late 2005 as follows:

28.    … In March 2005 I was appointed CEO of the Nudie fruit juice business. The juice business has really taken off in Australia. Nudie was the No. 1 new company start-up in 2004 as voted by Australian Business Review Weekly Magazine, which is the Australian equivalent of Forbes Magazine. We are getting a lot of good financial press in the Australian Business media. We have even been in discussion with a Richard Branson company with a view to acquiring it. Nudie is being sold in more than 4,000 shops in Australia including major supermarket chains. Nudie employs more than 100 people.

29.    … CHAMP, who are Australia’s largest private equity business owned by Castle Harlan in New York in 2004 invested an initial investment of $5.5 million in the Nudie business. This investment values the business Nudie at $29 million.

30.    … The fire at the factory in May 2004 where the Nudie business was being run from set the Nudie business back but we are rebounding from this set back.

31.    The fire destroyed all the equipment used to manufacture the juices for the Nudie and Tamarama business but Nudie outsourced the manufacture to various premises around Australia. But we need to get back into the Pagewood premises and manufacture the juice there, which will be more profitable for Nudie. My father wants to set up a new company to borrow monies from your bank so that it can on lend to Ligon 158, so that Ligon can rebuild the Pagewood premises so that Nudie can get back into its premises. Also we want to borrow money so that Ligon 158 and Ligon 237 can increase their investments in the Nudie Group business. Currently we own about 27.5% of Nudie, but my father wants to take control of Nudie because as you can see it is a growing business. Tamarama Fresh Juices had the equipment for the juice business at the Pagewood factory which was also destroyed in the fire. A loan is also needed so Tamarama can buy equipment for Nudie and the Tamarama business to be kept at the Pagewood premises.

32.    … My father also wants to borrow monies to invest in the Investec Fund, it is a private equity fund run by David Gonski. As you know he is a South African born Jewish Australian who is regarded as one of the best business minds in Australia. He is Chairman of Investec. David has invited my father to invest alongside him in the Fund. Also the Binetter entities may need funding for other business purposes.

86    In late December 2014, the Nudie juice business was sold for approximately $80 million.

“Binetter Entities”

87    The statement of claim defines, as the “Binetter Entities”, Erwin and Emil Binetter together with the third to tenth respondents. The expression “Binetter Entities” is used in the pleading of the fiduciary duties allegedly owed to the applicants by their various directors. The use of the collective description “Binetter Entities” reflects the liquidators’ case that the respondents were collectively responsible for giving effect to a single scheme in which the respondents had agreed to participate from December 1988 or, alternatively, November 1993. The evidence did not support such a simple analysis. Rather, the evidence was that different respondents participated to different extents in the conduct to which the applicants pointed as evidence of the scheme, and the giving effect to the scheme. This is not surprising because the events on which the applicants relied spanned from 1988 to the present, that is, a period of over 25 years.

88    On the other hand, there is evidence that the affairs of the applicants were treated as “family” affairs, in which family members had an interest.

89    For example, in 2003, either Michael or Andrew Binetter told Ronald Binetter that they needed to discuss loans with the Israeli banks. Ronald was asked to come along so he could look after Erwin Binetter, who was not well. The fact that Ronald was asked and agreed to make this trip supports a conclusion that the dealings with the Israeli banks were for the ultimate benefit of Michael, Andrew and Ronald Binetter as well as their father. Erwin, Michael, Andrew and Ronald Binetter travelled to Israel to meet with Bank Hapoalim.

90    According to Ronald Binetter, sometime in the late 2000s, Michael Binetter said to him:

Tax assessments have been received for a couple of the family companies. They are large tax assessments and they include Ligon 268.

91    Ronald Binetter gave evidence of a conversation with Andrew Binetter, around the time of Erwin Binetter’s death (that is, in August 2009), to the following effect:

Ronald:    What are the assessments about?

Andrew:    They’ve assessed us for taxes on the basis that we have loans. They say that those loans are based on deposits we have with banks overseas and that’s the basis of the assessments.

Ronald:    We do have money overseas.

Andrew:    We have money overseas and it is used as part of the security for the loans.

92    This conversation must have taken place after the issue of the revised assessments to one or more of the applicants. As noted earlier, revised assessments were issued to BCI and Binqld in December 2009.

93    In about August or September 2010, at a “family meeting”, Andrew Binetter said to Ronald Binetter:

We need to go overseas again, Ron and you need to come with us …

Michael and I are in charge of our dispute with the tax office. If we cannot travel, because we have our passports taken, then we need you to know where we go.

94    In October 2010, Andrew, Michael and Ronald Binetter took a complicated trip to Switzerland and Israel, apparently for the purpose of protecting or promoting shared financial interests. First, they flew to Frankfurt, Germany. One of Andrew or Michael said to Ronald:

We are going to Zurich but we don’t want an entry stamp into Zurich. We will fly into Frankfurt, then we will hire a car and we will drive from Frankfurt to Zurich.

95    In Zurich, Andrew, Michael and Ronald Binetter visited UBS and Bank Hapoalim. One of Andrew or Michael introduced Ronald Binetter to a banker at Bank Hapoalim.

96    After visiting Zurich, the three brothers travelled to Tel Aviv where they arrived on 31 October 2010. On 1 November 2010, they visited IDB. At IDB, they met a banker. One of Andrew or Michael introduced Ronald Binetter to her. Andrew and Michael participated in a lengthy meeting which Ronald Binetter left after about 30 minutes.

97    That night, after dinner, the brothers met Baruch Etzion. Mr Etzion was a former employee of Bank Hapoalim. The meeting was brief and the conversation was social and mostly between Andrew and Michael Binetter and Mr Etzion.

98    On 2 November 2010, the brothers flew back to London. On 3 November 2010, they flew to Lyon and drove to Geneva. After lunch at Geneva, they went to the offices of Bank Hapoalim. Andrew and Michael Binetter left Ronald Binetter at the reception for about 15 or 20 minutes and, when they returned, one of them introduced Ronald Binetter to a young banker. Andrew Binetter said: “We just want you to know where the bank is and how to get there”.

99    Finally, there is correspondence from Ligon 268 to IDB dated between November 2000 and May 2006 which is marked with file names that each included the words “family affairs”.

Dealings with the Australian Taxation Office (“ATO”)

100    The dealings between various of the respondents on behalf of the applicants and the ATO over the period from 1988 to the present can be divided roughly into the following periods, which overlap to some extent:

(1)    The period during which the applicants lodged annual income tax returns upon which the Commissioner issued assessments;

(2)    The period of the audit of entities associated with members of the families of Erwin and Emil Binetter, including the applicants;

(3)    The period during which the applicants disputed the revised assessments issued following the audit.

101    As part of their case, the liquidators contended that the directors of the applicants “deliberately set out to conceal from, and therefore mislead, the Commissioner as to the precise, correct and true nature of the transactions entered into by BCI with Bank Hapoalim and by EGL, Ligon 268 and Binqld with IDB”. This submission reflects a case which did not always focus on the conduct of individual respondents.

102    During the second and third periods, the applicants were represented by the lawyer Mark Douglass in their dealings with the ATO. There is evidence that Andrew and Michael Binetter both gave instructions to Mr Douglass or staff of his law firm on the basis of which he dealt with the ATO on behalf of the various applicants. Generally, there was no evidence that Mr Douglass acted on the direct instructions of any of Emil, Erwin, Margaret or Gary Binetter.

103    In closing submissions, Mr Williams SC acknowledged, in very general terms, that there was conduct in the course of the tax appeal proceedings that no one would suggest was honourable conduct. However, he argued, the Court does not need to make detailed findings about the respondents’ conduct after the commencement of the tax appeal proceedings because that conduct is “legally inconsequential”.

104    On behalf of the liquidators, Mr Marshall SC argued that lies allegedly told by Andrew, Emil and Gary Binetter in affidavits in the tax appeal proceedings were relevant to the factual question of the ownership of offshore deposits that secured advances from the Israeli banks to the applicants. First, it was submitted that alleged lies by Andrew Binetter about the existence of a deposit provide a basis to infer that he was in a position to control the deposits. As set out below, I have found that Andrew was one of the members of the Binetter family who was in a position to control deposits that formed security for advances made by the Israeli banks to the various applicants. Even assuming that Andrew Binetter told the relevant lies, I do not accept that this evidence adds weight to this finding.

105    Second, it was submitted that the alleged lies assist to prove one of the components of the alleged scheme, namely that the existence of the deposits would not be disclosed. Andrew Binetter conceded that none of the respondents ever disclosed the deposits to the Commissioner. There is no evidence that any of the respondents ever had any intention to disclose the existence of the deposits to the Commissioner. Putting aside the question of the alleged scheme, there can be no serious doubt that the dealings between the Israeli banks and BCI and EGL were documented in a manner that was intended by the applicants to conceal the existence of the deposits. (The position of Ligon 268 and Binqld is different because there was minimal evidence of the terms of their dealings with IDB.) It is not necessary to make findings about the alleged lies to fortify that conclusion. Judgment writing should not be “a process that is oppressive and that produces unnecessary prolixity”: Mitchell v Cullingral Pty Ltd [2012] NSWCA 389 at [2] (Allsop P, McColl JA agreeing).

Israeli banks

Bank Hapoalim Israel

106    The liquidators contended that Bank Hapoalim is a banking corporation organised and existing under the laws of the State of Israel which, at all times material to this action, acted through its central bank at 50 Rothschild Boulevard, Tel Aviv, Israel. In BCI’s tax appeal statement, BCI referred to Bank Hapoalim as an entity with which BCI had entered into loan agreements in 1993, the duration of one of which was subsequently extended in about 1997 and in 2006.

107    There are documents obtained from Bank Hapoalim and other documents from which I infer that Bank Hapoalim was carrying on a business of banking in Israel, which included the provision of loans.

Baruch Etzion

108    Mr Etzion made a statutory declaration dated 16 December 2009, in which he described himself as a lawyer admitted in Israel and a former Deputy General Manager of the Central Branch of Bank Hapoalim in the period 1985 to 1999. From 1999 to his retirement on 31 December 2001, Mr Etzion worked in the legal department of Bank Hapoalim. On 4 October 2011, Mr Etzion affirmed an affidavit in BCI’s tax appeal.

109    Mr Etzion was not called as a witness in this proceeding, however, the liquidators tendered the statutory declaration and the affidavit. The evidence of Deborah Huber, set out in detail below, strongly suggests that Mr Etzion had been corrupted by one or more members of the Binetter family. Ms Huber is the wife of Ronald Binetter. She gave evidence following the grant of a certificate under s 128 of the Evidence Act 1995 (Cth) and was not cross-examined. I accept Ms Huber’s evidence.

110    As set out in more detail below, Mr Etzion first met Erwin and Emil Binetter in about 1992. He was introduced to them by Mr Loew-Beer of IDB, Mr Etzion claimed to have been in charge of the “credit/loan department for major customers of the Bank” and, in that role, dealt with the “loans” given by Bank Hapoalim to BCI.

111    After their first meeting, Mr Etzion met Erwin and Emil Binetter occasionally in Israel over several years. The meetings occurred in his office at the bank. In November 1997, Mr Etzion was introduced to Andrew Binetter by Erwin Binetter – again, in Mr Etzion’s office in Israel.

112    The liquidators submitted that Mr Etzion was deployed on behalf of BCI to give evidence of fact as well as “expert” evidence to bolster the case of BCI in BCI’s tax appeal. Mr Etzion purported to give evidence of the banking practices of Bank Hapoalim. More significantly, in my view, Mr Etzion gave evidence of requesting “a list of assets so that we can see what the security will be” and evidence of the security for the “loans” to BCI without reference to the now admitted overseas cash deposits. In the light of those deposits, that evidence was plainly misleading. Andrew and Michael Binetter met with Mr Etzion in November 2010, after the revised assessments were issued. Andrew and Michael Binetter were in charge of the family’s tax disputes. It is likely that Andrew Binetter and Michael Binetter gave instructions to BCI’s lawyers for this misleading evidence to be served in BCI’s tax appeal. I find that they knew that the evidence was misleading at the time that it was served.

113    Mr Etzion also gave expert evidence of Israeli banking practices in support of tax appeal proceedings brought by Rawson Finances Pty Ltd (“Rawson Finances”), a company associated with Erwin and Andrew Binetter. The Andrew Binetter parties did not dispute that the effect of Mr Etzion’s evidence was that transactions with Israeli banks and in the amounts and of the type that were the subject of those proceedings were not unusual and did not require security other than personal guarantees. Such evidence would be irrelevant and misleading if the relevant transactions did, in fact, involve the provision of additional security such as cash deposits.

Bank Hapoalim Switzerland

114    The liquidators contended that each of Bank Hapoalim (Switzerland) Limited, Bank Hapoalim (Schweiz) and Banque Hapoalim (Suisse) SA was, and together were, banks carrying on the business of banking in Switzerland from an office at 33 Stockerstrasse Zurich, Switzerland (together, “Bank Hapoalim Switzerland”) as part of and/or in conjunction with, the banking business operated by Bank Hapoalim. The written correspondence between Bank Hapoalim Switzerland and Bank Hapoalim supports an inference to this effect.

Israeli Discount Bank Limited

115    The liquidators contended that IDB is a banking corporation organised and existing under the laws of the State of Israel which, at all times material to this action, acted from a branch at 16 Mapu Street, Tel Aviv, Israel.

116    In EGL’s SOFIC, EGL referred to IDB as an entity with which EGL had entered into loan agreements in 1988 and 1993.

117    In its statement of facts, issues and contentions (“Ligon 268’s SOFIC”) filed in AAT proceedings 1721 to 1730 of 2011 (“Ligon 268’s tax appeal”), Ligon 268 referred to IDB as an entity with which Ligon 268 had entered into loan agreements between about May 1998 and April 2006.

118    In its further amended statement of facts, issues and contentions (“Binqld’s SOFIC”) filed in the Binqld tax appeal, Binqld referred to IDB as an entity with which Binqld had entered into loan agreements in 2006 and 2007.

119    It was not in dispute that IDB carried on a business of banking in Israel, which included the provision of loans.

120    Hagai Peled and Fernanda Barisaac were representatives of IDB with whom some of the respondents had dealings.

Principles concerning fact finding

Failure to give evidence

121    None of Margaret, Andrew, Gary and Michael Binetter gave evidence. The documentary evidence demonstrates that many of the relevant facts were matters about which Andrew, Gary or Michael Binetter could have given evidence.

122    Where a plaintiff has the onus of proving a matter, and “relevant facts are peculiarly in the knowledge of the defendant or where the defendant has the greater means to produce evidence relating to those facts”, then if the plaintiff provides sufficient evidence from which the matter may be inferred, “the defendant then comes under an evidential burden, or an onus of adducing evidence”: Krstic v Brindley [2006] NSWSC 1414 at [26].

123    Where a fact is peculiarly within the knowledge of a party to litigation, slight evidence of that fact may suffice to prove the fact unless that evidence is explained away by the party with the knowledge of the fact: Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367 at 375; Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [121]; Parker v Paton (1941) 41 SR (NSW) 237 at 243; Ex parte Ferguson; Re Alexander (1944) 45 SR (NSW) 64 at 67, 70.

124    A failure by respondents to deny or explain facts when it was in the respondents’ exclusive power to do so allows increased strength or weight to be given to primary facts favourable to the applicants and allows inferences favourable to the applicants to be more confidently drawn: United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408; (2011) 198 FCR 514 at [75]-[76]. The silence of a party may serve to resolve a doubt or an ambiguity regarding the existence of a fact, especially where the facts are peculiarly within the knowledge of the silent party: Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125; (1996) 9 ANZ Insurance Cases 61-385 at 142.

125    All evidence “is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”: Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572 at [14]–[15], Hodgson JA (with whom Beazley JA agreed) said:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …

126    In RHG Mortgage Ltd v Ianni [2015] NSWCA 56, McColl JA (with whom Sackville AJA agreed) said (at [76]):

The circumstances for drawing a Jones v Dunkel inference are found where the uncalled witness is “a person presumably able to put the true complexion on the facts relied on [by a party] as the ground” for any inference favourable to the plaintiff: Jones v Dunkel (at 308) per Kitto J; Australian Securities and Investments Commission (ASIC) v Hellicar [2012] HCA 17; (2012) 247 CLR 345 (at [168]) per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ.

127    In the passage from Australian Securities and Investments Commission (ASIC) v Hellicar (2012) HCA 17; (2012) 247 CLR 345 to which McColl JA was referring, the High Court emphasised that a missing witness will only be significant where the evidence which such a person is expected to give would (not might) elucidate a particular matter in issue.

128    As to the significance to be given to the failure to adduce the evidence, that is explained in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 itself where it was said (at 308) per Kitto J (and see also at 312 per Menzies J, and at 320-321 per Windeyer J) that:

[A]ny inference favourable to the plaintiff for which there was ground in the evidence might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness.

129    This aspect of the principle is summarised in Cross on Evidence, where it is stated (at [1215]) that:

[T]he rule [in Jones v Dunkel] only applies where a party is “‘required to explain or contradict”‘ something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts “‘requiring an answer”‘.

(Citations omitted).

130    Thus, there must be some existing basis in the evidence before the Court to support the inference which the party relying on the principle seeks to have drawn before the absence of evidence from the opponent takes on any significance.

131    In Paul’s Retail Pty Ltd v Sporte Leisure Pty Ltd [2012] FCAFC 51; (2012) 202 FCR 286, the Full Federal Court (Jacobson, Yates and Katzmann JJ) said (at [95]):

The purpose of the rule is to enable the tribunal of fact to more readily draw an inference “fairly to be drawn from the other evidence” if a witness able to contradict that inference has not been called: State Bank (NSW) v Brown (2001) 38 ACSR 715 at [17]-[18] per Spigelman CJ. Such an inference is drawn, if at all, once all the evidence in the case is in. Before that can happen, there must first be an available inference against the party on the evidence: Manly Council v Byrne [2004] NSWCA 123 per Campbell J, Beazley JA and Pearlman AJA agreeing at [54].

132    In Department of Health v Arumugam [1988] VR 319; (1988) 30 AILR 117 at 330, Fullagar J said:

If all that is proved, by inference or otherwise, in the absence of explanation, is less than all the elements of proof required for the complaint to succeed, neither a total absence of explanation nor a non-acceptance of an explanation can by itself provide an element of proof required. It can enable already available inferences to be drawn against dishonest explainers with greater certainty, but that is all.

Destruction or suppression of evidence

133    If a litigant (or their agent) does anything which tends to suggest a lack of confidence in that litigant’s position in litigation, this is a matter that can be taken into account and lead to an inference that the facts essential for the litigant to maintain his position are lacking: Li v The Herald and Weekly Times Pty Ltd [2007] VSC 109; (2007) ATR 81-887 (“Li v Herald and Weekly Times”) at [305]–[306].

134    Examples of such conduct include “the destruction of, or failure to produce, important relevant documents, particularly incriminating ones, and the subornation of a witness or the fabrication of evidence” as well as recourse to lies: Li v Herald and Weekly Times at [306], [309]; Tobin v Ezekiel [2012] NSWCA 285; (2012) 83 NSWLR 757 at [60]–[62]. Statements by a litigant that he is unable to recollect an event or the details thereof may, in combination with other evidence, evidence a consciousness of liability: R v Cuenco [2007] VSCA 41; (2007) 16 VR 118 at [20].

135    The inference to be drawn depends on the consciousness that is demonstrated by the litigant’s conduct. Conduct, including bribery or destruction of evidence, may be such as to suggest a consciousness that the litigant’s case is generally weak. Conduct such as the failure to produce a specific document or witness may indicate a weakness of a specific part of the case: Li v Herald and Weekly Times at [307].

Inferring knowledge from holding office as a director?

136    On behalf of the liquidators, Mr Marshall SC made a submission that the directors’ knowledge of the offshore deposits could be inferred from the fact that they held the office of directors. It was not clear whether he sought to have a wider submission that knowledge of a director as to the company’s activities could be inferred from the fact of holding office as a director.

137    I do not accept that there is a general proposition as to the inferences of knowledge that may be drawn from the fact that a person holds office as a director. In my view, this must depend upon the circumstances of the case and, in particular, any evidence about the director’s participation in the management of the company. I do not accept that the decision in Texxcon Pty Ltd v Austexx Corporation Pty Ltd [2011] VSC 203 supports a broader proposition.

138    A director’s continuing obligation to keep informed about the activities of the corporation (Daniels v Anderson (1995) 37 NSWLR 438; (1995) 118 FLR 248 (“Daniels”) at 503) does not permit a general inference as to knowledge, not least because the relevant director may not have complied with that obligation.

The liquidators’ case

The alleged scheme involving Israeli banks

139    The liquidators’ case was based on the premise that the respondents participated in a “scheme” involving Israeli banks, for their benefit and, ultimately, to the detriment of the applicants. The scheme was allegedly implemented by four sets of transactions, involving:

(1)    BCI and Bank Hapoalim;

(2)    EGL and IDB;

(3)    Ligon 268 and IDB; and

(4)    Binqld and IDB.

140    The statement of claim pleads the scheme, its purposes and its result as follows:

20.    From a date no later than December 1988, or alternatively from a date no later than November 1993, each and all of Emil Binetter, Erwin Binetter, Margaret Binetter, Andrew Binetter, Gary Binetter, Michael Binetter, Milgerd Nominees, Erma Nominees, Ligon 159 and Ligon 158 (together, ‘“the Binetter Entities’”) agreed to participate in a scheme (‘the scheme involving Israeli banks’) whereby:

20.1    a company would be incorporated in Australia by the Binetter Entities, or a company would be acquired by the Binetter Entities (‘an Australian finance company’);

20.2    an Australian finance company would purport to enter into a transaction with an Israeli Bank;

20.3    the transaction between the Israeli Bank and the Australian finance company would be documented by the Binetter Entities or some of them so as to give the appearance that the transaction comprised a loan of funds from the Israeli Bank to the company, which was secured only by guarantees given by the Binetter Entities or some of them;

20.4    funds held or controlled by the Binetter Entities with banks or other entities outside of Australia (‘offshore funds’) equal to the amount of the purported loan from the Israeli Bank to the Australian finance company would be deposited with the Israeli Bank so as to constitute security to the Israeli Bank for the advance of funds to the Australian finance company (described as a ‘back-to-back’ arrangement) and interest would accrue on the offshore funds to the ultimate benefit of the Binetter Entities or some of them (‘offshore income’);

20.5    each and all of Emil Binetter, Erwin Binetter, Michael Binetter, Andrew Binetter and Gary Binetter would, in their own capacities, in their capacities as directors of the Australian finance company and, or, in their capacities as directors of the companies compromising the Binetter Entities, sign documents and have communications with the Israeli Bank by documentation:

20.5.1    to give the appearance of a loan from the Israeli Bank on terms as to interest, interest payments and repayment, which was secured by guarantees only; and

20.5.2    to conceal the offshore funds, the offshore income and the back-to-back arrangement;

20.6    funds received from the Israeli Bank would then be advanced by the Australian finance company under the control of the Binetter Entities to one or more of Milgerd Nominees and, or, Erma Nominees, at a purported rate of interest and on terms which matched the purported rates of interest and terms of the purported loan from the Israeli Bank;

20.1    in turn, the funds purportedly so loaned to Milgerd Nominees and, or, Erma Nominees would be further advanced by Milgerd Nominees to Ligon 159, or by Erma Nominees to Ligon 158, at terms and at rates of interest which match the terms and rates of interest of the purported loan and purported terms and purported rates of interest;

20.2    the funds further so advanced to Ligon 159 or Ligon 158 or to both would be used by Ligon 159 and by Ligon 158 in furtherance of business activities to earn income including, through investments and further advances, in property investments, in commercial    retail investments, in commercial and residential property developments, in residential real estate investments, in nursing home businesses, and in fruit juice businesses; and

20.3    the Australian finance company which had purportedly borrowed monies from the Israeli Bank would declare, in its income tax return, as income, the interest from the monies which it had on-loaned directly or indirectly to one or more of Milgerd Nominees, Erma Nominees, Ligon 159 and, or, Ligon 158 and would claim, as a deductible expense under the Income Tax Assessment Act 1936 (Cth) against that income, an amount equal to the purported rate of interest which was purportedly payable to the Israeli Bank.

21.     The purposes of the scheme involving Israeli banks were to:

21.1    allow the Binetter Entities to have the benefit in Australia of offshore funds, while the offshore funds accrued offshore income;

21.2    conceal the offshore funds and offshore income from the Commissioner of Taxation in Australia (‘the Commissioner’);

21.3    interpose the Australian finance companies between the Binetter Entities and the Israeli Banks;

21.4    arrange a situation whereby the Australian finance company and the Binetter Entities or some of them could claim deductible expenses in connection with the use by them in Australia of the offshore funds; and

21.5    thereby evade or, alternatively, avoid liability to pay income tax to the Commissioner.

22.    As a result of the scheme involving Israeli banks:

22.1    the Australian finance companies incorporated or acquired by the Binetter Entities to enter into the purported loan transactions with Israeli banks claimed deductions for interest in each of their income tax returns for each financial year;

22.2    the Australian finance companies were exposed to a risk of audit by the Commissioner and a risk that the Commissioner would issue them with assessments or amended assessments which disallowed the interest expenses claimed as deductible expenses; and

22.3    the Binetter Entities acted so as to benefit those entities to the detriment of the Australian finance companies.

141    The liquidators’ case was the scheme was implemented using each of the applicants as an “Australian finance company”. The liquidators contended that the applicants could not ever have benefitted from the scheme and it should be inferred that they were never intended to. The liquidators acknowledged that the applicants derived significant interest income from the scheme, but argued that this was not a benefit because the interest income was always matched by an equivalent, or substantially equivalent expense paid to one of the Israeli banks.

Scheme

142    The “scheme” as pleaded is the type of arrangement or course of conduct that might be described as a scheme within the meaning of Part IVA of the ITAA 1936. In that context, “scheme” is defined very broadly to mean:

(a)    any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)    any scheme, plan, proposal, action, course of action or course of conduct.

143    I am doubtful that the liquidators’ characterisation of the relevant arrangements or course of conduct as a scheme significantly advanced their case.

Purposes of the scheme

144    In competition legislation, the “purpose” of an arrangement means the effect which is sought to be achieved. The purpose of an arrangement will typically be inferred from the nature of the arrangement, the circumstances in which it was made and its likely effect: Dowling v Dalgety Australia Ltd (1992) 34 FCR 109, particularly in the absence of evidence to the contrary from the parties to the arrangement.

145    I understood the liquidators’ case on the purposes of the scheme to be directed to the states of knowledge of the various participants in the scheme.

Summary of conclusions about the alleged scheme

146    On the evidence set out below, I find that Erwin and Emil Binetter agreed to participate in a scheme involving EGL and IDB and, subsequently, BCI and Bank Hapoalim, broadly to the effect of the alleged scheme, although it will be necessary to be precise about the elements of the scheme that are supported by the evidence.

147    In particular, the scheme, as initially implemented, involved:

(1)    “back-to-back” arrangements by which funds, in the control of Erwin and Emil Binetter, deposited outside of Australia (“offshore deposits”) were used as security for advances of funds by the Israeli banks to the various applicants;

(2)    providing funds obtained pursuant to the “back-to-back” arrangements to various of the corporate respondents to assist in their business activities in Australia;

(3)    documenting the arrangements between the applicants and the Israeli banks so as to permit the applicants, if required, dishonestly to produce documents purportedly evidencing the arrangements but which did not disclose the offshore deposits;

(4)    lodging income tax returns on behalf of EGL and BCI which would declare no, or no significant, taxable income, because any income disclosed would be offset by substantially equivalent amounts claimed to be deductible expenses and generally (but not always) referable to payments to the Israeli banks, described in contemporaneous records as payments of interest to the Israeli banks.

148    I also find that Milgerd, Erma, Ligon 159 and Ligon 158 were parties to the scheme from its inception. I do not find that Margaret Binetter agreed to participate in or facilitate a scheme of the kind alleged, or in any scheme to avoid or evade income tax. I find that each of Andrew and Michael Binetter agreed to participate in or took steps to facilitate the scheme at various times.

149    Ligon 268 and Binqld subsequently entered into transactions with IDB that involved the key elements of the scheme set out above. Ligon 268’s income tax returns were affected by its role as trustee of the Bankstown Eye Trust, but it did not disclose any significant taxable income from its activities as a lender of funds obtained from IDB.

150    Following from the conclusion that the scheme involved documenting the transaction in a manner which would not reveal the existence of the offshore deposits, I find that those who arranged the documentation intended to conceal the existence of the offshore deposits and any income earned from the deposits, principally by seeking to ensure that the applicants’ records would create the false impression that the terms of the transactions were not affected by the deposits.

151    Based on the elements of the scheme, I find that its purposes, and the purposes of those respondents who participated in it, included the following:

(1)    to allow various of the respondents to have the benefit in Australia of the funds comprising the offshore deposits, without transferring those funds to Australia;

(2)    to interpose the applicants between various of the respondents and the Israeli banks;

(3)    to arrange a situation whereby each of the applicants treated transfers of funds from the Israeli banks as loan funds and the applicants and various of the respondents claimed, as deductible interest expenses, amounts said to be liabilities to the Israeli banks, on the basis of documentation which, if produced by an applicant to the ATO, would enable the applicant to conceal dishonestly important aspects of the transactions with the Israeli banks (particularly, the existence of the offshore deposits and the recipient or recipients of interest paid on the offshore funds, but also the true quantum of payments made to the banks in consideration of their respective participations in the arrangements); and

(4)    to thereby evade liability to pay income tax to the Commissioner or to assist others to evade their tax liabilities.

152    As for the results of the scheme, I find that they included the following:

(1)    the applicants claimed deductions for overseas interest expenses in each of their income tax returns for the income years in respect of which the Commissioner ultimately issued the revised assessments;

(2)    each of the applicants was exposed to a risk that, in the event of a tax audit, the Commissioner would issue them with revised assessments which disallowed the interest expenses claimed as deductible expenses (and which treated as assessable income certain amounts received by the applicants from the Israeli banks), because the applicants would not produce documents and provide information to explain the totality of the relevant transactions and, therefore, would not substantiate the claimed deductions;

(3)    each of the applicants was exposed to a risk of that, in the event of a tax audit, the Commissioner would impose penalties and issue assessments requiring payment of interest on primary tax liabilities (including general interest charge and shortfall interest charge), because the documents and information supplied to support the interest expenses would not explain the totality of the relevant transactions and would cause ATO officers to strongly suspect, as was the case, that the advances from the Israeli bank were the subject of a security by way of a back-to-back deposit which may affect the correct tax treatment of both the advances and the claimed interest expenses; and

(4)    various of the respondents, in implementing the scheme, acted so as to benefit various of the respondents to the detriment of the applicants.

153    Thus, the scheme (and the individual transactions undertaken in pursuance of the scheme) operated to the benefit of various of the respondents but, if revealed, would operate to the detriment of the applicant companies. Such detriments would include liabilities to pay income tax for which the relevant applicant company would not otherwise have been liable, liabilities to pay penalties on assessments issued by the Commissioner and liabilities to pay interest including shortfall interest charges and general interest charges.

The liquidators’ legal characterisation of transactions pursuant to the scheme

Loans

154    In Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753; (2012) 89 ATR 357 at [20], Edmonds J explained:

The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B: Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22; (1997) 72 FCR 300 at 313 per Sackville and Lehane JJ; Commissioner of Taxation v Firth (2002) 120 FCR 450 at [73] per Sackville and Finn JJ. Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan. The obligation of repayment is not proved by subsequent payment of the same amount, let alone a different amount, from B to A; that may be explicable by reference to another obligation or circumstance having nothing to do with the original payment from A to B. Rather, the obligation of repayment is proved by the terms of the contract under which the money was transferred from A to B.

155    In Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22; (1997) 72 FCR 300 at 313, Sackville and Lehane JJ explained the concept of a loan as follows:

A loan involves an obligation on the borrower to repay the sum borrowed. The matter is put this way by Dr Pannam:

“A loan of money may be defined, in general terms, as a simple contract whereby one person (the lender) pays or agrees to pay a sum of money in consideration of a promise by another person (the borrower) to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid. The essence of the transaction is the promise of repayment.

As Lowe J put it in a judgment delivered on behalf of himself and Gavan Duffy and Martin JJ: ‘“Lend” in its ordinary meaning in our view imports an obligation on the borrower to repay.’ [Ferguson v O’Neil [1943] VicLawRp 3; [1943] VLR 30 at 32.] Without that promise, for example, the old indebitatus count of money lent would not lay. Repayment is the ingredient which links together the definitions of ‘loan’ to be found in the Oxford English Dictionary, the various legal dictionaries and the text books. In essence then a loan is a payment of money to or for someone on the condition that it will be repaid.’

C L Pannam, The Law of Money Lenders in Australia and New Zealand (1965), at 6. See also Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] VicRp 68; [1992] 2 VR 279, at 321-323, per Ormiston J.

156    A similar definition of loan was given in Commissioner of Taxation v Firth [2002] FCAFC 95; (2002) 120 FCR 450 at [73] per Sackville and Finn JJ.

157    The respondents’ case was that the various advances from the Israeli banks to the applicants were loans. In the absence from evidence on behalf of the Israeli banks, and in the absence of oral evidence from any of the respondents themselves, I am not satisfied as to the precise terms upon which any of the advances were made. In particular, without knowing the terms on which the admitted offshore deposits secured the advances, I am not satisfied that I should rely on any of the documents which purport to evidence loan arrangements at face value. It is quite possible that the terms of those documents are affected, or even contradicted, by the terms on which the admitted offshore deposits secured the advances. It is also possible, as Mr Etzion said, that the “financial source” of the advances was funds owned by some entity associated with the Binetters. Without understanding more about the true facts, I am unable to reach a conclusion about whether this possibility would affect the characterisation of the advances as loans.

“Back-to-back” loans

158    The concept of a “back-to-back” loan was said, by the liquidators, to be central to their case. The liquidators’ opening submissions described, as a “back-to-back” transaction, a transaction whereby funds under the control of the respondents and deposited with banks in Switzerland and in Israel were used to procure the advance of funds by the Israeli banks to the applicant companies.

159    As noted earlier, the ATO summarised “back-to-back loans” as:

An Australian taxpayer, with funds offshore, accesses this money by ‘borrowing’ it through an international promoter or directly. The funds may be used for working capital and the interest claimed as a deduction which continues to “top-up” the offshore funds.

160    This description contains an element which is different from the description of a “back-to-back” transaction in the applicants’ opening submissions: it suggests that the transaction involves a purported loan of funds which, in truth, are the taxpayer’s own funds. It raises a question about whether a “back-to-back loan” is a species of loan or whether it has characteristics which are different from a loan.

161    The Andrew Binetter parties contended that the liquidators’ expert evidence demonstrated how “back-to-back” transactions were part of the ordinary banking practices of Bank Hapoalim and how the “back-to-back” nature of the BCI transaction (involving third party security) was entirely unremarkable. The evidence of Mr Ben Zeev, an Israeli banker and long term employee of Bank Hapoalim, was that in cases where the collateral (or security) for a loan is a deposit of money, the loan will be described as a “back-to-back loan”. In particular, back-to-back loans are where the loan matches the deposit in terms of the maturity date. If the loan term is for five years, then the deposit will also be given a five year term and “applicable” interest rate. The deposit will have to be at least the same size as the loan. The deposit for the back-to-back loan will also be in the same currency as the loan because otherwise the bank would be exposed to foreign exchange risk.

162    Whether “back-to-back” transactions are part of the ordinary business practices of Bank Hapoalim is beside the point, as evidenced by the efforts made, on the part of various of the respondents, to characterise the advances made by the Israeli banks to the applicants as loans secured by personal guarantees and not by cash deposits. As noted earlier, in an effort to avoid the ATO discovering the “back-to-back” nature of the transactions, Michael Binetter took steps to procure the destruction of Bank Hapoalim’s files.

163    Although not evidence of the actual terms of the transactions between BCI and Bank Hapoalim, in March 2015, Mr Etzion gave the following answers in the course of an examination:

Q.    What are the extent of the details that you know about who deposited and when, in the deposits in trust, in Bank Hapoalim in Switzerland, in regards to the loans that the Company took?

A.    I am a man of Bank Hapoalim and not a man of Bank Hapoalim (Switzerland), but as it seems to me, if I remember correctly, someone who is close to them, in my opinion not Emil and Erwin themselves, deposited the trust in Switzerland. When Bank Hapoalim Tel-Aviv required, for the purpose of strengthening collateral, a bank guarantee from the Bank in Switzerland, Emil and Erwin refused. They did not want a bank guarantee that connected Bank Hapoalim (Switzerland) with Bank Hapoalim in Tel-Aviv.

Q.    You say that you think that the loans were promised by a deposit in trust.

A.    I did not say it. I said that according to my understanding and my recollection, it was done in this way: the money was deposited in Bank Hapoalim in Switzerland, I suppose.

In my opinion, Bank Hapoalim in Switzerland deposited a trust in order to give loans to Bank Hapoalim in Tel-Aviv. It asked Bank Hapoalim in Tel-Aviv to also be responsible for it. This has created a security system that I wanted to prepare.

…

Q.    Did you know that the arrangement with the Company was back-to-back loans?

A.    At that time, certainly.

Q.    Do you mean on 15/10/09?

A.    Yes.

Q.    Please confirm that according to the terms of the loan from 1993, the loans taken by the Company were secured by trusts.

A.     I cannot confirm this because I have not seen a document that represents it. It could be, but I have not seen a document. I know that the financial source of these loans was a trust which in my opinion was guaranteed.

164    Mr Etzion’s evidence suggests that the transactions between BCI and Bank Hapoalim were aptly described as “back-to-back loans” and involved accessing funds offshore which were the “financial source” of the loans.

165    In answer to the question “Can you explain the arrangement of back-to-back?”, Mr Etzion said:

There is a financial back to back and a security back to back. Back to back means you deposit a trust in order to get a loan. In both cases you deposit a trust to get a loan. In a financial back to back, the conditions of the deposit are adapted to the terms of the loan but the trust is not used as collateral for the loan. It is the physical source of the loan funds. In a security back to back loan, the money is also used as collateral.

166    I have addressed the admissibility of this evidence below. In my view, the evidence illustrates the opacity of the arrangements between BCI and Bank Hapoalim and the necessity to understand the totality of the arrangements pursuant to which the payments were made in order to determine whether the advances from Bank Hapoalim to BCI were loans.

167    Based upon the respondents’ concessions and on the evidence including the evidence of Mr Ben Zeev (set out below) concerning the nature of a “back-to-back loan”, I find that each transfer of funds from Bank Hapoalim or IDB to one of the applicants, identified in the chronological findings of fact below, was a transfer pursuant to an arrangement that included the provision, by or on behalf of the relevant applicant, of a deposit, in an amount at least equivalent to the amount of the funds transferred to the relevant applicant, over which the relevant bank had rights.

168    If more is needed to demonstrate the significance of the characterisation of the relevant transactions as “back-to-back”, there is the observation of BCI’s proposed expert witness on Israeli banking practices, Ms Lusthaus. When she saw a Hebrew bank statement from BCI dated 15 October 2009, which included the words “back-to-back”, she told BCI’s lawyer (by email dated 6 November 2013):

Eli and I have started to go through the material, and we have a problem that might be quite serious.

In tab 42 there is a statement by the Bank in relation to the loans. There is a page in Hebrew which is a statement of the loans. The problem we see is under the heading of Loans, it is written as follows: Loans

    Back to back; constant rate … (the first loan)

Back to back; constant rate … (the second loan)

The wording of back to back seems to indicate that the loans were secured, even if informally, by deposits. That is the usual meaning in Hebrew of the term “back to back”.

If that is the case, we think that it changes the whole picture.

169    One reason why it might be relevant to know if a transaction is a “back-to-back” transaction is that this may affect the pricing of the transaction, because the risk of such a transaction to the party advancing funds is different from the risk of a standalone transaction. As Mr Ben Zeev noted “when the loan is fully collateralised by cash the exposure to the Bank is very low. If the borrower defaults then the Bank is able to access the deposit”. More particularly, it is possible that the terms of collateral transactions affect the correct identification of the expenses incurred under a transaction in gaining or producing assessable income. For example, terms about payment of interest on the so-called “loan” might be affected by terms about payment of interest by the relevant bank in respect of the “back-to-back” deposits. However, it is not possible to reach any conclusion without knowing all of the terms of the relevant arrangements.

Sham

Role of sham in the liquidators’ case

170    The Andrew Binetter parties contended that the liquidators’ factual case “proceeds from the foundational assertion that the loans which the applicants had with Israeli banks and in respect of which they claimed interest deductions were shams”.

171    The word “sham” is used on four occasions in the statement of claim – once in connection with each of the applicants. In each case, the allegation is that the impugned transactions exposed the relevant applicant to a risk that the Commissioner would issue it with assessments or amended assessments which disallowed the interest expenses claimed by it as deductible expenses and/or assessed the relevant applicant for income on the basis of a decision by the Commissioner that the impugned transactions were a sham. In each case, the allegation is made in the alternative to allegations that the Commissioner would issue such assessments or amended assessments on the basis of a decision that the impugned transactions were not for an income producing purpose, pursuant to s 99B or Part X or Part IVA of the ITAA 1936 or on any other basis.

172    The word “sham” is used twice in the liquidators’ narrative, at paras 255 and 571. In each case, the Commissioner’s conclusion of “sham” is recorded (concerning the transactions presented to it by BCI and Binqld) and it is asserted that the Commissioner’s conclusion was correct and accurately described the true position.

173    The Gary Binetter parties contended that the applicants changed their position during the case on the question of sham. Ultimately, they said, the case appears to be that, on the materials given to the ATO, the Commissioner was entitled to conclude that the relevant transactions were a sham and to rely on that conclusion to issue the various revised assessments. The Gary Binetter parties argued that the notion of sham is apparent in allegations of “purported” transactions and in the allegations, in paras 197.1 and 197.2 of the statement of claim, that the “purported” transactions between BCI and Bank Hapoalim were a “device” and that the documentation prepared was “intended to create an appearance, which was false, to the effect that the purported Bank Hapoalim Transactions was a genuine commercial loan transaction between Bank Hapoalim and BCI”.

The liquidators’ case on “purported” transactions

174    The words “purport” and “purported” are first used in the statement of claim to describe elements of the alleged scheme.

175    Paragraph 20.2 refers to the purported entry into a transaction between an “Australian finance company” (which I will refer to as a “Binetter finance company”) and an Israeli bank. However, it is clear from the succeeding paragraphs that it is not alleged that there was intended to be no transaction between those parties. For example, it is alleged in para 20.4 that “offshore funds “would be deposited with the Israeli bank so as to constitute security to the Israeli Bank for the advance of funds to” the Binetter finance company. Paragraph 20.2 alleges that one element of the scheme was that a Binetter finance company would claim to have entered into a transaction with an Israeli bank having certain features, when in truth it had entered into a transaction with the bank having one or more other features (such as the provision of a cash deposit equivalent to the amount of the advance, as security for the advance).

176    It follows that I read the references to “the purported loan” in paras 20.4, 20.6 and 20.7 as references to a transaction which was or would be documented as a loan having particular terms but which, the liquidators contended, had different or other terms from the true transaction.

177    The alleged scheme refers to the advance of funds at “purported” rates of interest. As I understood the liquidators’ case, it was that the rates of interest stipulated in the loan documentation were not rates for interest charges that were imposed by the bank as amounts that it would earn on the transactions but, rather, rates that were used to calculate the quantum of payments by the borrower to the bank wholly or partly for the benefit of an entity other than the bank, being an entity associated with one or more of the respondents.

Is there a dichotomy between “back-to-back” transactions and sham?

178    The Andrew Binetter parties contended that the very existence of a “back-to-back” loan is antithetical to an argument that the loans from the Israeli banks were shams. As noted above, I do not accept that the advances from the Israeli banks were loans. But, in any event, I do not accept the Andrew Binetter parties’ contention.

179    The classic definition of sham, given by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 (“Snook”) at 802, is:

… acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips), that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.

180    In Hitch v Stone [2001] EWCA Civ 63, [2001] S.T.C. 214 at [63], Arden LJ identified the following particular type of sham transaction:

It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties… or the court, the appearance of creating different rights and obligations.

181    In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46] the High Court stated:

“Sham” is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.

182    In Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy [1988] FCA 266; (1988) 18 FCR 449. At 454, the Full Court comprising Lockhart, Beaumont and Foster JJ, cited Diplock LJ’s judgment in Snook and held:

A “sham” is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

183    In this case, I understand the alleged sham to be the documents relied upon by the applicants to justify their claims for interest expenses, and for the non-inclusion of monies advanced from the Israeli banks as income, where such documents were (it is alleged) a “false front” for the true transactions. The alleged true transactions included, as a critical element, offshore deposits equivalent to the amount of the advances as security for the advances. The alleged sham is not that the documents disguised advances of the applicants’ own funds from Israel to Australia. If that were the allegation, then I would conclude that the applicants have not demonstrated a sham of that kind. In my view, the evidence does not permit the Court to reach a view about the true terms of the arrangements between the applicants and the banks because of the likelihood that the totality of the arrangements included one or more terms which affected, qualified or contradicted the terms recorded in the available documents.

184    I have no hesitation in concluding:

(1)    The documents provided to the ATO by each of the applicants did not reveal the totality of the arrangements between the applicants and the Israeli banks because they did not reveal the arrangements concerning the offshore deposits, and those arrangements formed part of the arrangements between the applicants and the Israeli banks;

(2)    The documents provided to the ATO by BCI and EGL were designed to conceal the totality of the arrangements between those applicants and the Israeli banks (whatever was the totality of those arrangements). This aspect of the design of the transactions is most painfully revealed by the communications between Bank Hapoalim and Bank Hapoalim Switzerland which show that those banks sought (without complete success) to maintain a separation between the documentation of the advances from Bank Hapoalim to BCI and the documentation of the so-called fiduciary deposits which secured the advances.

185    It follows that I accept the Commissioner’s conclusion that the BCI and EGL documents were shams. I do not reach the same conclusion in relation to the Ligon 268 and Binqld documents because those applicants never purported to provide the ATO with a complete suite of the documents governing their respective transactions with the Israeli banks.

186    The Andrew Binetter parties put, as an apparently serious submission, that the applicants’ directors went to extraordinary lengths to convince the Commissioner that the loans from Israeli banks were not shams but genuine transactions. They complain that “[t]heir protestations fell on deaf ears”. As those protestations should have. Michael and Andrew Binetter went to extraordinary lengths to cause the applicants to contest the revised assessments while failing to disclose the existence of the deposits that “change[d] the whole picture”. Michael Binetter (then a practising lawyer) went so far as to try to arrange the destruction of documents which might have disclosed the existence of the offshore deposits and the terms upon which those deposits secured the advances to the applicants.

187    The Andrew Binetter parties also put a submission that the liquidators’ contention that the directors had concealed the use of offshore funds as security for the loans was a “red herring”. It was put that the Commissioner must have believed, from an early point in time, that the loans were secured by offshore deposits. If the directors had provided proof of what the Commissioner had always believed to be the true position, the applicants’ position would have been no different. I accept that there is no reason to suppose that, if the applicants had provided proof of the existence of offshore deposits, that would have satisfied either the Commissioner or a court in tax appeal proceedings that the revised assessments should be set aside.

The offshore deposits and “back-to-back” arrangements

188    Paragraph 20.4 of the statement of claim alleges, as an element of the scheme, that:

[F]unds held or controlled by the Binetter Entities with banks or other entities outside of Australia (‘offshore funds’) equal to the amount of the purported loan from the Israeli Bank to the Australian finance company would be deposited with the Israeli Bank so as to constitute security to the Israeli Bank for the advance of funds to the Australian finance company (described as a ‘back-to-back’ arrangement).

189    The liquidators relied upon a document entitled “Applicants’ Updated Narrative Statement of Facts and Contentions with responses of the respondents included” dated 30 September 2015 (“liquidators’ narrative”).

190    By the Gary Binetter parties’ response to an earlier version of the liquidators’ narrative, filed 26 August 2015, the Gary Binetter parties stated that they “do not dispute that part of the security for the loans” to each of BCI and EGL were “deposits”.

191    By their “Further amended response to the applicants’ amended narrative” dated 24 September 2015, the Margaret Binetter parties admitted that “there was an overseas cash deposit that, in part, secured the advance from Bank Hapoalim to BCI” but not that Margaret Binetter knew such a fact.

192    By the Andrew Binetter parties’ “Further amended response to applicants’ amended narrative statement of facts and contentions”, those parties accepted:

… for the purposes only of these proceedings that based on the evidence adduced by the applicants and absent evidence from them to the contrary, the court would find that:

(a)     each of the loans the subject of the proceedings was additionally secured by a third party cash deposit (but not that any of the Andrew Binnetter Respondents had knowledge of that fact at any relevant time);

(b)     the existence of a third party cash deposit as additional security for the loans was at no time disclosed to the Commissioner.

193    In his “Further response to amended narrative” dated 18 September 2015, Michael Binetter accepted that the applicants’ evidence disclosed that:

(1)    each of the loans the subject of the proceeding was additionally secured by a third party cash deposit (but not that he had knowledge of that fact at any relevant point in time); and

(2)    the existence of a third party cash deposit as additional security for the loans was at no relevant time disclosed to the Commissioner by the borrowing company.

194    To be clear, it was not part of Michael Binetter’s case that the deposits were disclosed to the Commissioner by some other person or entity.

195    The Andrew Binetter parties submitted that, in the light of the respondents’ concessions, “the Court will find that each of the loans was the subject of a security by way of a back-to-back deposit”.

196    Despite the carefully worded concessions set out above, and notwithstanding the documentary evidence that the Israeli banks described their advances to the applicants as “loans”, I do not accept that these characterisations of the advances as “loans” is determinative without knowing the totality of the arrangements affecting the advances. In particular, the statements made by Mr Etzion, and set out above, lead me to conclude that I cannot take at face value communications between the applicants and the Israeli banks about their arrangements.

197    In particular, in the case of BCI, the existence of deposits in amount equivalent to the amount of funds transferred to BCI is confirmed by correspondence between Bank Hapoalim and Bank Hapoalim Switzerland, set out below. In the case of Ligon 268, the existence of a “deposit account” connected with Ligon 268 is shown by a bank statement for account no. 10627881 printed out on 23 July 2012.

198    The respondents have not divulged, either to the ATO or to this Court, the totality of the arrangements between the applicants and the Israeli banks. In saying this, I am not intending to make a finding that any of the respondents was under a legal obligation to do so or that any of the respondents was armed with sufficient knowledge to divulge the totality of the arrangements at any given time. However, I do infer (from the evidence below) that, to the extent that any of the respondents did not have such knowledge at any given time, he, she or it could have obtained that information and could have provided it to the ATO or to the Court.

Knowledge of the offshore deposits as part of the relevant transactions

199    In my view, once the evidence demonstrated that various of the director respondents participated in procuring advances from the Israeli banks, the evidentiary burden shifted to them to demonstrate that they did not know (or understand) the terms of financial transactions in which they were participating. That evidentiary burden was not discharged. Thus, I accept the liquidators’ case that each such director knew that any advance which he procured, or assisted to procure, formed part of what the liquidators described as a “back-to-back” arrangement, being the arrangements that the respondents now concede to have been the fact.

200    As explained below, the knowledge of the various individual directors can be imputed to the companies of which they were directors. Thus, for example, facts known by Erwin Binetter about the terms of transactions involving BCI, can be taken to have been known by Erma and Ligon 158 as a result of his directorships of those companies.

Source and ownership of the offshore deposits

201    As noted above, Andrew and Ronald Binetter were in agreement that “we have money overseas”. For the purposes of their discussion, this was apparently a sufficiently accurate description of the true state of affairs. Andrew told Ronald that this money was used “as part of the security for the loans” connected with the revised assessments.

Ms Huber’s evidence

202    Ms Huber said that Michael Binetter had told an Israeli lawyer called Amiram Gicelter (“Mr Gicelter”) that offshore funds, used to fund deposits to secure loans from Israeli banks, were derived from funds that Erwin and Emil Binetter took out of Australia. Ms Huber also gave evidence that, in a conversation with Mr Gicelter on 26 June 2012, Gary Binetter had described the offshore funds as “black money”. In my view, Gary Binetter was intending to convey to Mr Gicelter that income tax had not been paid in Australia on the offshore funds.

203    It is convenient to set out the entirety of Ms Huber’s relevant evidence at this point.

204    The context is that, on 5 March 2012, the Commissioner filed an interlocutory application in BCI’s tax appeal seeking an order that a letter of request be sent to the judicial authorities of Israel to take evidence of an officer of Bank Hapoalim and an order that BCI take all reasonable steps to procure or obtain all or any documents in the possession, power or control of Mr Etzion.

205    Ronald Binetter and Ms Huber arrived in Israel for a vacation on 24 April 2012. During their vacation, they received a telephone call from Michael Binetter seeking Ms Huber’s help to find a lawyer in Israel to assist in connection with the production of documents. Ms Huber speaks and writes Hebrew fluently: apparently, Michael Binetter did not.

206    Ms Huber located Mr Gicelter.

207    Shortly after, Ms Huber attended a meeting with Mr Gicelter and Michael Binetter in Tel Aviv. Before the meeting, Michael Binetter said to Ms Huber words to the effect:

Deb, you have to come with me to the meeting with the lawyer. You speak Hebrew and I want you to be the client so that it cannot come back to me.

208    At the commencement of the meeting, Michael Binetter said to Mr Gicelter: “It’s extremely important that Deborah is the client”. This evidence is consistent with my conclusion that Michael Binetter took particular care as to the roles that he adopted in connection with the various respondents. At least on the occasion of the meeting with Mr Gicelter, Michael Binetter took this care in an effort to conceal misconduct on his part.

209    There was then a conversation to the following effect:

Mr Gicelter said to Michael: What’s the problem?

Michael said: The Australian tax office has been carrying out an investigation called Operation Wickenby after they raided a tax accountant and seized his laptop. They found my name on his laptop.

Mr Gicelter said: Have you done anything wrong?

Michael said: Absolutely not! But the Australian tax office began investigating my family and issued amended assessments, which we have been fighting. One of the companies is in Court now. The assessments relate to allegations that the companies had back-to-back loans with Israeli banks. We are concerned about what might be in the bank files about “back to back” loans.

Ms Huber asked: What’s a back-to-back loan?

Michael said to Ms Huber: The allegation is that loans which have been granted by Israeli banks are supported by cash deposits. Our position is that the loans were secured by a personal guarantee.

Mr Gicelter said to Michael: Were they back-to-back loans?

Michael said: Yes. The loans were secured by large cash deposits in Switzerland and Israel. But the cash deposits are held by a bank which has a separate banking licence, so they won’t find it.

…

Mr Gicelter then said to Michael: Well, where did the money come from?

Michael said: My father and his brother took the money out of Australia.

At some point during the conversation, Michael also said: The bank in question is Bank Hapoalim. We have someone in Bank Hapoalim – a man called Baruch Etzion who we’ve been giving money and gifts to for many years and he has given evidence that it was quite normal practice to give loans secured by a personal guarantee alone. We have been giving Baruch presents and gifts so he will give the evidence that is correct for us.

Michael then asked Mr Gicelter: Do you think an Israeli bank would produce our customer records if a Court ordered them?

Mr Gicelter replied: I think they would. The days of Israeli banks protecting the secrecy of their customers are over – they now want to be part of the international banking community and will not do that anymore.

After Michael had explained the above matters to Mr Gicelter, Mr Gicelter said: Well, what do you really want from me?

Michael said: Can you find someone to give evidence to say that it was usual practice of Israeli banks to give unsecured loans?

Mr Gicelter said: I could give that evidence.

Michael then asked: I don’t think that’s going to be very useful.

Michael then abruptly changed topic and said words to the effect of: Do you know anyone who could copy or destroy the file held by Bank Hapoalim on us?

Mr Gicelter said: Possibly we do know somebody who could help you.

After a discussion between Mr Gicelter and his colleagues in Hebrew, Mr Gicelter turned to Michael and said in English words to the effect of: “Yes, I think we know somebody who could help you, but we will have to check and get back to you”.

Subsequently, Mr Gicelter said:    Well, we are not talking about hard copy files. This is 2012 and it is going to be electronic files. They would have to be accessed at night.

Michael said:    We want the files destroyed. If we only get a copy, we have no control over what is ultimately produced. I am particularly concerned about meetings where negotiations for the loans took place and whether there are any file notes of who attended those meetings.

After this conversation, the meeting concluded with a discussion about costs and further communications. I can recall the conversation occurring to the following effect:

Michael said: Should we discuss how much this will cost? Will it cost a lot of money?

Mr Gicelter: I will get back to you about the cost once I know I can help you.

Michael said: Deborah is to be the contact point. There is a Court deadline coming up for the production of documents. (Michael said the date, but Ms Huber could not recall what date he said.) The file needs to be accessed or destroyed before then.

210    In the absence of any evidence from Michael Binetter, in my view, the particular concern expressed by Michael Binetter in this conversation arose from facts including that he had participated in negotiations for loans with Bank Hapoalim on behalf of BCI and that he had attended meetings at which those negotiations were conducted on behalf of BCI.

211    After the meeting, Michael Binetter said to Ms Huber: “That’s the first time that I’ve met a lawyer who really understands what we need”.

212    At the request of Michael and Andrew Binetter, Ms Huber thereafter made telephone calls from Australia to Mr Gicelter asking about progress, to which Mr Gicelter responded: “It is a difficult matter but we have found the person”.

213    Subsequently, Mr Gicelter requested payment of $3,000. After arranging this payment, Ms Huber received a telephone call from Michael Binetter asking her to attend a meeting at his house. At the meeting, Michael and Andrew Binetter asked Ms Huber to go back to Israel with Andrew Binetter for another meeting with Mr Gicelter. During that conversation, Michael Binetter said:

I don’t want to go back to Israel. But Andrew’s going and it’s important that you go as well. It’s a critical matter.

214    Around this time, Mr Gicelter called Ms Huber and requested $60,000. Ms Huber then had the following conversation with Andrew Binetter:

Ms Huber: Amiram says the price we have to pay for the man at Bank Hapoalim is $60,000.

Andrew: I will arrange the payment.

215    Ms Huber had email communications with Mr Gicelter including one in which she said: “153,495NIS sent today will be in your account tomorrow”.

216    This email confirmed a payment of Israeli shekels, which is probably a payment made in response to Mr Gicelter’s request for $60,000. In response, Mr Gicelter sent the following message:

Received. It’s only 65% but he is starting to work…Therefor you must be in contact with me before you arrive to make sure he has it all.

217    In my view, this disgraceful episode demonstrates that Michael Binetter was participating (in a dishonest way) in the management of BCI’s tax dispute which, by then was the principal business of BCI. In doing so, he was acting as a de facto director of BCI. It also supports a conclusion that Michael Binetter had previously participated in the management of BCI by taking part in the negotiation of the arrangements between BCI and Bank Hapoalim, which were the principal business of BCI. In that participation, he acted as a de facto director of BCI.

218    Ms Huber returned to Israel on 24 June 2012. She gave the following account of a conversation, during a meeting on 26 June 2012 in Israel which she attended with Andrew and Gary Binetter and Mr Gicelter:

Gary:         Mark Douglass is a really good friend of mine and has said to me that there is nothing illegal about back to back loans.

Mr Gicelter:     Well, it depends on where the money has come from.

Gary:     You realise that it’s black money we’re talking about.

Mr Gicelter:     Yes I realise that.

219    On the basis of Ms Huber’s evidence, I find that the offshore deposits were proceeds of monies originally taken out of Australia by Erwin and Emil Binetter to one or more locations outside Australia.

Other evidence about the source of the deposits

220    Ronald Binetter gave evidence that Erwin Binetter had said to him, in the mid-2000s: “I have other loans from Israeli banks including Bank Hapoalim and Mizrahi Bank” and “I have money at the bank in Israel”.

221    Documentary evidence, set out below, refers to the deposits. None of this evidence came from the applicants. It was mainly obtained by the ATO pursuant to a letter of request ordered to be sent to the judicial authorities of Israel pursuant to s 7 of the Foreign Evidence Act 1994 (Cth): BCI Finances Pty Limited v Commissioner of Taxation [2012] FCA 855; (2010) 89 ATR 861.

Conclusions about source of the offshore deposits

222    Based on the evidence of Ms Huber and the documentary evidence, and the absence of any evidence from the respondents to the contrary, I find that the offshore deposits that secured each of the advances from Bank Hapoalim and IDB were probably located in Switzerland or Israel at all relevant times. They were funds that were accumulated by Erwin and Emil Binetter, were owned by them, and were available to them, and to the various applicants, to be used to obtain transfers of funds from the Israeli banks to the applicants in Australia.

223    The Andrew Binetter parties submitted that, in the absence of evidence as to the precise source of the deposits, “there was no rational, let alone proper, basis for the Commissioner to treat the advances made under the loans from the Israeli banks as the funds of the applicants or as income”. I do not agree. First, I do not accept that the advances should be characterised as loans (within the meaning of Australian law) where the totality of the arrangements between the applicants and the Israeli banks has not been established. The Commissioner’s power to issue a default assessment arose under s 167 of the ITAA 1936 because the Commissioner was not satisfied with the returns that had been furnished. The Commissioner had good grounds not to be so satisfied because the information provided to support the income tax returns did not explain the totality of the relevant transactions. Once the Commissioner reached this view, he was empowered to make an assessment of the amount of income tax which, in his judgment, ought to be levied. That included treating the identified advances as income in the absence of cogent evidence about the true position, on the basis that they were inadequately explained receipts. It was then a matter for the taxpayer (as a person with knowledge of the true facts) to demonstrate, if it was the case, that the assessment was incorrect: cf. Evans v Federal Commissioner of Taxation (1989) 20 ATR 922; (1989) 89 ATC 4540 at 4545 (Hill J).

Ronald Binetter’s evidence about ownership of offshore funds

224    I have referred to Ronald Binetter’s evidence of a conversation with Andrew Binetter in which they agreed that “[w]e have money overseas”.

225    I have also referred to Ronald Binetter’s evidence of a conversation in which Andrew Binetter asked him to travel to Switzerland with Michael Binetter to learn how to get access to funds in Switzerland. In October 2010, the three of them travelled to Zurich and visited the offices of UBS and Bank Hapoalim. They next travelled to Tel Aviv where, on 1 November 2010, Ronald Binetter was introduced to a banker at IDB. The same evening, Ronald Binetter attended a meeting with his two brothers and Mr Etzion.

226    The three Binetter brothers then travelled to Geneva, where they visited another office of Bank Hapoalim. Michael and Andrew Binetter went into the offices without Ronald Binetter before coming out and introducing Ronald to a young banker.

227    Based on this evidence, and in the absence of evidence from Michael and Andrew Binetter, I find that, by at least October 2010, they each had an ownership interest in funds in Switzerland. There is no evidence that the position was any different at any earlier point from May 1993 when Bank Hapoalim first advanced funds to BCI.

228    As noted earlier, Michael Binetter told Mr Gicelter that the BCI advances were secured by “large cash deposits” in Switzerland and Israel, held by a bank with a separate banking licence.

Respondents’ submissions

229    Mr Williams SC submitted that the Commissioner was either unable or unwilling to pursue the identity of the funds which he had long contended must have existed in an overseas account and must have been used as the countervailing security. He submitted that the Commissioner was unable or unwilling to pursue the identity of those funds or the “evasive taxpayers laying claim to those funds”.

230    For their part, the respondents did not identify the offshore deposits with precision, or the beneficial owner or owners of the offshore deposits.

Conclusions

231    In the absence of any evidence from the respondents about a more complex or different position, each of Erwin, Emil, Andrew, Michael and Gary Binetter owned all or part of the offshore funds from which the offshore deposits were sourced at various times.

232    Those funds were originally accumulated by Erwin and Emil Binetter.

233    The ownership of Andrew, Michael and Gary Binetter is inferred from their status as children of Erwin and Emil Binetter, their participation in the transactions in which the offshore deposits were deployed as security and from the evidence that offshore funds were referred to as money belonging to the family collectively (Andrew and Ronald Binetter’s statements that “we have money overseas”) and that the affairs of the family were considered, as between the family, collectively (Michael Binetter’s statement that “Tax assessments have been received for a couple of the family companies”).

234    In the case of Andrew Binetter, it is also inferred from his dealing with the deposit fund the subject of the 2006 letter of irrevocable instructions. In the case of Michael Binetter, it also inferred from the fact that deposits were made available for transactions for the benefit of Ligon 268 (of which he was majority shareholder) and Binqld (of which he was sole shareholder).

235    Once it is found that Michael Binetter was an owner of the offshore deposit or deposits that secured advances to BCI, the contention that his dealings on behalf of BCI are properly understood as the discharge of functions as BCI’s solicitor is implausible. Those dealings involved the deployment of offshore deposits in respect of which Michael Binetter had an ownership interest. I should note that Michael Binetter did not submit that he was acting as BCI’s solicitor in his dealings with Mr Gicelter.

When the existence of the offshore deposits was known

236    Erwin and Emil Binetter knew about the offshore deposits securing the advances to BCI and EGL at all relevant times. I do not find that Margaret Binetter knew about the deposits at any relevant time.

237    Michael and Andrew Binetter knew of the deposits securing the BCI and EGL loans from the commencement of their participation in the management of each company, and about the deposits securing the advances from IDB to Ligon 268 and Binqld when those advances were made.

238    Gary Binetter had a general awareness of the existence of the deposits from at least June 2012, based on his conversation with Ms Huber and Mr Gicelter on 26 June 2012.

Michael Binetter’s “de facto” or “shadow” directorships

239    In summary, the liquidators contended that Michael Binetter was a de facto or shadow director of each of the applicants, except to the extent that he held a valid appointment as a director.

240    By s 9(b) of the Corporations Act, a director means relevantly, a person who is not validly appointed as a director if:

(i)    they act in the position of a director [a de facto director]; or

(ii)    the directors of the company are accustomed to act in accordance with the person’s instructions or wishes [a shadow director].

241    The court applies an objective test in determining whether a person is a de facto director: Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 W.L.R. 189 at [39]. A person may still be a de facto director even if the company concerned has a properly constituted and functioning board: Grimaldi v Chameleon Mining NL [2012] FCAFC 6; (2012) 200 FCR 296 (“Grimaldi”) at [74] and [132] to [134]. Whether a company has held out a person as a director is a relevant consideration: Grimaldi at [75].

242    The liquidators submitted that it is necessary to consider the functions that would be expected to be performed by a director of the relevant company in the circumstances, the functions carried out by the alleged “de facto” director and whether the person was held out as a director by the company. The role and functions performed by a director will vary with the commercial context, operations and governance structure of the relevant company. The functions assumed need not relate to all facets of the management of the company’s business: Grimaldi at [65] to [69].

243    A person may alternatively, or also, be a “shadow” director. Generally, being “accustomed to act” in accordance with the wishes of a person involves “habitual compliance over a period of time”: Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410 (“Buzzle”) at [248]. Although the directors collectively must be accustomed to act on the person’s instructions or wishes, it is sufficient if a governing majority is so accustomed: Buzzle at [250]. The instructions of the shadow director need not be given in relation to the whole of the corporation’s activities for which directors are responsible: Buzzle at [241].

244    Ford’s Principles of Corporations Law summarises the following factors which are considered by courts in deciding whether a person is a de facto director:

(1)    the duties that would be expected to be performed by a director in the relevant company – noting that this will vary according to matters such as the size of the company and the allocation of the responsibilities within the company. This is subject to the requirement that the person performs what the court in Deputy Commissioner of Taxation v Austin [1998] FCA 1034; (1998) 28 ACSR 565 referred to as “top-level management functions”;

(2)    the duties actually performed by the person;

(3)    whether others in the company considered the person a director;

(4)    whether the company held out the person as a director;

(5)    whether the person held themselves out as a director; and

(6)    whether those outside the company considered the person to be a director.

245    The businesses of the applicants are identified earlier in these reasons. Except for Ligon 268 (which was also trustee of the Bankstown Eye Trust), the businesses comprised procuring and on-lending funds to related companies. In that context, the role of the directors was primarily concerned with procuring funds from the Israeli banks to support the business activities of associated entities in Australia, in a way that involved minimal tax liabilities. For those directors who had agreed to participate in or facilitate the scheme, their roles included:

(1)    procuring the “back-to-back” arrangements by which offshore funds were used as security for advances of funds by the Israeli banks to the various applicants;

(2)    documenting the arrangements so as to permit the applicants to produce documents purportedly evidencing the arrangements but which did not disclose the offshore deposits;

(3)    causing or procuring the lodgement of income tax returns on behalf of the relevant applicant which would declare no or no significant taxable income referable to the transactions that occurred as a consequence of the “back-to-back” arrangements.

246    After the revised assessments were issued, the role of the directors of each of the applicants included managing the subsequent tax disputes.

Summary of conclusions

247    I do not find that Michael Binetter was a shadow director of any of the applicants. The evidence does not support a conclusion that, at any particular time, or during any particular period, any applicant or any director of any applicant was accustomed to act in accordance with his wishes.

248    The evidence does not support a conclusion, for any of the applicants or Erma or Ligon 158, that at any time:

(1)    others in the relevant applicant company considered Michael Binetter a director;

(2)    the relevant applicant held out Michael Binetter as a director;

(3)    Michael Binetter held himself out as a director; or

(4)    those outside the relevant applicant considered Michael Binetter to be a director.

249    Based on the evidence of his participation in the tax disputes between the applicants and the ATO, identified below, I infer that Michael Binetter was a de facto director of each of the applicant companies after the commencement of the ATO tax audit. In that role, he caused or procured the lodgement of several income tax returns by the applicants pursuant to the scheme. I reject the contention that I should find Michael Binetter was acting as company solicitor for the various applicant companies after the commencement of the audit, particularly in the absence of any evidence from Michael Binetter himself to support that finding. Particularly in the light of the misconduct revealed by Ms Huber’s evidence, in my view, if Michael Binetter was to have the benefit of a finding to the effect contended for, it was necessary for him to step into the witness box to explain the facts by which he should be understood to have acted as a solicitor for the applicant companies following the commencement of the ATO tax audit rather than as a de facto director.

250    On the evidence set out below, I find that Michael Binetter was a de facto director of BCI when he took steps to procure the arrangements between BCI and Bank Hapoalim, and to procure the documentation of the arrangements so as to permit BCI to retain documents purportedly evidencing the arrangements but which did not disclose the offshore deposits.

251    Otherwise, I do not find that Michael Binetter was a de facto director of the applicant companies or of Erma or Ligon 158.

Alleged directors’ duties

Fiduciary duties

252    The applicants’ claim against the first to sixth respondents is primarily for breach of fiduciary duty. The fiduciary duties are pleaded in similar terms for each applicant. For BCI, the alleged fiduciary duties are:

27.1    a duty not to permit the interests of any member of the Binetter Entities to conflict with the interests of BCI Finances;

27.2    a duty not to allow the duties which each of them owed as directors to BCI Finances to conflict, directly or indirectly, with the interests of each of them personally and with the interests of each and all of the Binetter Entities;

27.3    a duty not to derive a benefit, directly or indirectly, for any one or more of the Binetter Entities from information acquired or acts done by each of them as a director of BCI Finances; and

27.4    a duty not to allow or cause the interests of BCI Finances to be affected adversely, or to permit, directly or indirectly, any detriment to BCI Finances for the benefit, directly or indirectly, of any of them in their capacity as directors or for the benefit of any of the Binetter Entities.

253    The respondents did not dispute that the various directors owed the relevant applicants fiduciary duties, but challenged the applicants’ articulation of the scope of the duties.

254    In submissions in reply, the applicants submitted that the fiduciary duties pleaded in the statement of claim “convey adequately the nature of the relevant fiduciary duties owed by each of the directors … to each of the relevant companies” and referred to the language of para 27.1 not to “conflict with the interests of BCI” and 27.4 not to “cause the interests of BCI to be affected adversely”.

255    In Mills v Mills [1938] HCA 4; (1938) 60 CLR 150, Dixon J said (at 185-186):

Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. It is only one application of the general doctrine expressed by Lord Northington in Aleyn v. Belchier: “No point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void.”

… The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is in the case of a trustee exercising a special power of appointment. It must, as it seems to me, take the substantial object the accomplishment of which formed the real ground of the board’s action. If this is within the scope of the power, then the power has been validly exercised. But if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable.

256    In Pilmer v The Duke Group Ltd [2001] HCA 31; (2001) CLR 165 at [74], McHugh, Gummow, Hayne and Callinan JJ approved the following passage from Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at 113:

In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.

257    At [78], their Honours concluded, relevantly:

[T]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is “a conflict or a real or substantial possibility of a conflict” between personal interests of the fiduciary and those to whom the duty is owed.

258    In John Alexander’s Clubs Pty Ltd v White City Tennis Club Limited [2010] HCA 19; (2010) 241 CLR 1 at [87], the High Court said:

Mason J began his treatment of the issue whether HPI was a fiduciary by identifying the critical feature of what may be called the accepted traditional categories of fiduciary relationship – trustee-beneficiary, agent-principal, solicitor-client, employee-employer, director-company, and partners inter se. That critical feature was “that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. From this power or discretion comes the duty to exercise it in the interests of the person to whom it is owed.

259    In Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251 at [114], Hammerschlag J summarised the relevant principles succinctly as follows:

For over 100 years, it has been the law that directors owe duties of a fiduciary nature to act as best to promote the interests of the corporation whose affairs they are conducting. It has been a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which they have, or can have, a personal interest conflicting or which may conflict with the interests of those whom they are bound by fiduciary duty to protect.

260    In my view, the relevant fiduciary duties owed by the respondent directors are narrower than the pleaded duties and are:

(1)    a duty not to permit the interests of the relevant director to conflict with the interests of the relevant applicant company, without the company’s informed consent (“conflict duty”);

(2)    a duty not to exercise a power conferred upon the relevant director in order to obtain some private advantage or for any purpose foreign to the power (“proper purpose duty”);

(3)    a duty not to exercise a power conferred upon the relevant director in a manner which is detrimental to the interests of the relevant company (“company interests duty”).

261    Once the relevant duties are expressed in this way, it is necessary to consider what was in the interests of the applicant companies and what was the scope of the powers conferred upon the directors of the applicant companies. Broadly speaking, the interests of each applicant company was to carry on the business for which it existed which was, relevantly, to procure funds from Israeli banks for on-lending to related companies.

262    The interests of the applicants did not include activities or ends that would require the relevant applicant to do any act prohibited by law: cf Corporations Act, s 124(3).

263    Writing extra-judicially, Hayne J (as he then was) suggested that, at least at times of financial distress, the interests of the company may be explained by and tested against the notion of the company surviving as a solvent entity: Hayne, KM. “Directors Duties and a Company’s Creditors” at 808. Even so, for the purposes of assessing a relevant decision “the focus would remain, as it must, upon whether the relevant organ of the company acted within its powers ‘bona fide for the end designed’”.

264    At least as a general proposition, the interests of the applicant companies included carrying on business in a manner which did not expose them to liabilities to pay penalties and interest charges under income tax legislation, or to incur tax debts which would render them insolvent. It is not in the interests of a company to lodge a false income tax return. It is not in the interests of a company to lodge an income tax return which includes deductions for expenses that cannot or will not be substantiated by the records that record and explain the transactions or acts that justify the deductions.

Statutory duties

265    The applicants pleaded the following duties owed by the various respondents in respect of the applicant companies of which he or she was a director:

(1)    a duty under s 180(1) of the Corporations Act to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the corporation’s circumstances.

(2)    a duty under s 181(1) to exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose.

(3)    a duty under s 182(1) not to use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.

266    Although the case based on breaches of statutory duty was not withdrawn, it was not addressed in closing submissions and Mr Marshall SC said that the liquidators primarily put their case on the general law duties. Accordingly, I have not given separate consideration to whether any of the respondents contravened any of pleaded statutory duties.

Common law and equitable duties

267    The applicants relied upon the directors’ common law and equitable duties of care: Permanent Building Society (in Liq) v Wheeler (1994) 11 WAR 187; (1994) 12 ACLC 674; (1994) 12 ACSR 109 and Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 (“Rich”).

268    The respondents did not dispute that there is a core irreducible requirement of skill and diligence, measured objectively, that every director must exercise regardless of their actual skills or experience: Rich at [7205]–[7206]; Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113 (“Clark”) at [108]–[109]. This brings with it a requirement of involvement in the management of the company, and requires a director to take reasonable steps to place himself or herself in a position to guide and monitor the management of the company: Clark at [108]–[109]; Daniels at 501. A director is under a continuing obligation to become and remain informed about the activities of the company of which he or she is a director: Daniels at 503.

269    A failure to take reasonable care and diligence can take many forms and may, for example, overlap with a failure to act in the best interests of the company and for a proper purpose: cf Ford’s Principles of Corporations Law at [8.305].

To whom are directors’ duties owed?

270    The respondents accepted the general proposition that directors’ duties are owed to the company as a whole.

271    They argued that, for the applicants, the company as a whole was constituted by the shareholders. Applying these principles, the Andrew Binetter parties contended that:

(1)    the directors of BCI owed their duties to the shareholders of BCI as a whole, that is, to Erwin and Emil Binetter;

(2)    the directors of EGL owed their duties to Milgerd and Erma;

(3)    the directors of Ligon 268 owed their duties to Erwin and Michael Binetter; and

(4)    Andrew Binetter as director of Binqld owed his duties in that capacity to Michael Binetter.

272    In Greenhalgh v Arderne Cinemas Ltd [1951] Ch. 286; [1950] 2 All E.R. 1120 (“Greenhalgh”) at 91, Evershed MR explained that the phrase “the company as a whole” did not (at least in the case under decision) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. In Peters’ American Delicacy Co Ltd v Heath [1939] HCA 2; (1939) 61 CLR 457 at 512, Dixon J said:

“[B]benefit as a whole” is but a very general expression negativing purposes foreign to the company’s operations, affairs and organisations… The “company as a whole” is a corporate entity consisting of all the shareholders.

Each of these cases concerned an internal dispute between shareholders, which is a different situation from this one.

273    In Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (“Kinsela”) at 730, Street CJ (Hope JA and McHugh JA agreeing) expressed the view that the general principles expressed in cases like Greenhalgh do not apply in a situation in which the interests of the company as a whole involve the rights of creditors as distinct from the rights of shareholders. Street CJ said:

In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.

274    However, it is clear that directors do not owe an independent duty to, and enforceable by, the creditors by reason of their position as directors: Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603 at [95] (Gaudron, McHugh, Gummow and Hayne JJ).

275    In Bilta (UK) Ltd (in liq) v Nazir [2015] UKSC 23; [2016] AC 1; [2015] 2 WLR 1168 (“Bilta”), Lord Toulson and Lord Hodge said (at [125] and [126]):

A director of an insolvent company is not directly a fiduciary agent of the creditors and cannot be sued by an individual creditor for breach of the fiduciary duty owed by the director to the company: Yukong Line Ltd v Rendsburg Investments Corpn (No 2) [1998] 1 WLR 294.

Instead, the protection which the law gives to the creditors of an insolvent company while it remains under the directors’ management is through the medium of the directors’ fiduciary duty to the company, whose interests are not to be treated as synonymous with those of the shareholders but rather as embracing those of the creditors.

276    At [130], their Lordships said:

… In everyday language, the purpose of the inclusion of the creditors’ interests within the scope of the fiduciary duty of the directors of an insolvent company towards the company is so that the directors should not be off the hook if they act in disregard of the creditors’ interests.

277    Having regard to these authorities, I reject the submission that the duties of the applicants’ directors to the various applicant companies are to be understood as duties owed to the applicants’ shareholders. The extent to which directors are required to take into account the interests of creditors in their management of the company is contentious. As a general proposition, the best interests of the company will depend on various factors including solvency: Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507 at [67] (Gummow and Hayne JJ).

Informed consent

278    The general principle that any act that falls within the corporate capacity of a company will bind it if it is done with the unanimous consent of all shareholders does not enable the shareholders to bind the company itself to a transaction which constitutes a fraud on its creditors: In re Halt Garage (1964 Ltd) [1982] 3 All ER 1016 at 1037; Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246; Kinsela at 730.

279    In Kinsela, at 732, Street CJ concluded that, where the directors are involved in a breach of their duty to the company affecting the interests of creditors, the shareholders cannot authorise the breach.

280    In Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230 at [30], Gleeson CJ, Gummow and Hayne JJ stated:

The self-interested “consent” of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company.

281    Similarly, at [74], McHugh J said:

The consent of a sole shareholder cannot cure what would otherwise be a fraudulent taking or application of the company’s property.

282    At [131], Callinan J stated that any “consent” by the relevant company for a use of monies contrary to its lawful objects could not be a real and effective consent, and nor could consent to an illegality be a lawful consent.

283    In Bilta, the UK Supreme Court considered whether a company could pursue its directors and sole shareholder for breaches of duty towards the company which deprived it of its assets. At [38], Lord Mance said:

A company has its own separate legal personality and interests. Duties are owed to it by those officers who constitute its directing mind and will, similarly to the way in which they are owed by other more ordinary employees or agents. All the shareholders of a solvent company acting unanimously may in certain circumstances (which need not here be considered, since it is not suggested that they may apply) be able to authorise what might otherwise be misconduct towards the company. But even the shareholders of a company which is insolvent or facing insolvency cannot do this to the prejudice of its creditors, and the company’s officers owe a particular duty to safeguard the interest of such creditors. There is no basis for regarding the various statutory remedies available to a liquidator against defaulting officers as making this duty or its enforcement redundant.

284    The Andrew Binetter parties’ submission, that the requirement of lack of consent is part of the proper formulation of the directors’ fiduciary duty, seemed to imply that fully informed consent is not a defence to a breach of fiduciary duty: cf. Thomson v Golden Destiny Investments Pty Limited [2015] NSWSC 1176 (“Thomson”) at [84]; Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 204. If that was the submission, I do not accept it. Where such a defence is relied upon, the onus of proof lies on the fiduciary: see Thomson at [85], citing Birtchnell v Equity Trustees, Executors and Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 398 (Isaacs J) and the cases cited therein.

Alleged breaches of duty

285    The alleged breaches of duty, as identified in the liquidators’ 4 September 2015 statement of claim notes, are set out in the following paragraphs of the statement of claim:

(1)    for BCI, paras 198 to 202;

(2)    for EGL, paras 227 to 231;

(3)    for Ligon 268, paras 256 to 259;

(4)    for Binqld, paras 275 to 278.

286    For BCI, the primary allegation is contained in para 198 which states:

In taking each of the steps and in giving effect to each of the constituent parts of the purported Bank Hapoalim Transactions, each of Erwin Binetter (until his death on 25 August 2009), Emil Binetter, Margaret Binetter, Andrew Binetter, Gary Binetter and Michael Binetter acted in breach of the fiduciary duties which they owed to BCI Finances, in breach of the common law and equitable duties of care that they owed to BCI Finances and in breach of the statutory duties which they owed to BCI Finances as directors of BCI Finances.

287    Thus, the liquidators contended that conduct comprising “taking each of the steps and … giving effect to each of the constituent parts of the purported Bank Hapoalim Transactions” constituted breaches of each of the pleaded duties.

288    Paragraphs 199 to 202 allege that:

(1)    “taking each of the steps to conceal the true purpose and effect of the purported Bank Hapoalim Transactions”;

(2)    “making the decision to dismiss the Tax Appeal Proceedings and … taking steps to implement that decision”;

(3)    “making the decision to appoint administrators and … taking steps to implement that decision”; and

(4)    “taking the further and ongoing steps to conceal the true purpose and effect of the purported Bank Hapoalim Transactions”;

also constituted breaches of the same duties.

289    The allegations of breach in the statement of claim are prefaced by a lengthy allegation about knowledge of the relevant respondents as follows:

197.    By causing the incorporation of BCI Finances and, or, by acquiring BCI Finances and in causing BCI Finances to enter into the purported Bank Hapoalim Transactions as part of the scheme involving Israeli banks, each of Erwin Binetter (until his death on 25 August 2009), Emil Binetter, Margaret Binetter, Andrew Binetter, Gary Binetter and Michael Binetter knew:

197.1    that the purported Bank Hapoalim Transactions was a device to assist the Binetter Entities in having access to and, or, the benefit of the offshore funds to assist in the business activities of the Binetter Entities in Australia;

197.2    that the documentation prepared and exchanged with Bank Hapoalim was intended to create an appearance, which was false, to the effect that the purported Bank Hapoalim Transactions was a genuine commercial loan transaction between Bank Hapoalim and BCI Finances;

197.3    that, in fact, the purported Bank Hapoalim Transactions involved a back-to-back arrangement whereby offshore funds under the control of the Binetter Entities could be, by means of the back-to-back arrangement, used by the Binetter Entities without disclosing the existence or nature of the offshore funds;

197.4    that each and all of BCI Finances, EGL, Erma Nominees, Milgerd Nominees, Ligon 159 and Ligon 158 would declare income in relation to purported loans derived from the purported loan from Bank Hapoalim and claim as a deductible expense against that income interest at a rate which matched the purported rate of interest payable by BCI Finances to Bank Hapoalim, thereby avoiding assessable income tax and the amount of tax payable and to be paid by those Binetter Entities;

197.5    that the purported Bank Hapoalim Transactions would also allow profit made by the Binetter Entities to be paid to Bank Hapoalim and, or, Bank Hapoalim Switzerland to augment offshore funds, purportedly as interest payments due to Bank Hapoalim, in circumstances where those funds would be so paid to augment offshore funds without tax having been paid on those funds;

197.6    that the purported Bank Hapoalim Transactions therefore involved BCI Finances in a broader scheme which operated to the benefit of the Binetter Entities and which, if revealed, would operate to the detriment of BCI Finances, which detriment included a liability to pay income tax for which it would not otherwise have any liability, a liability to pay a penalty on any assessments or amended assessments issued by the Commissioner and a liability to pay general interest charges on any assessments or amended assessments issued by the Commissioner;

197.7    that the steps taken by the Binetter Entities to conceal the true nature of the purported Bank Hapoalim Transactions had the effect that BCI Finances would be unable to discharge its onus of establishing that any assessments issued by the Commissioner of Taxation which disallowed the interest expenses claimed as deductible expenses were excessive;

197.8    that the steps taken by the Binetter Entities to conceal the true nature of the purported Bank Hapoalim Transaction would incur significant legal costs and would expose BCI Finances to significant legal costs of the Commissioner of Taxation in the Tax Appeal Proceedings, which legal costs would not otherwise have been incurred and for which BCI Finances would not otherwise have been exposed; and

197.9    that the appointment of administrators to BCI Finances would further burden BCI Finances with the costs of the administration and the costs of liquidation, including the costs and expenses incurred by the liquidators and lawyers engaged by them in properly investigating the facts and circumstances relating to the purported Bank Hapoalim Transactions and the steps taken by the Binetter Entities to conceal the purported Bank Hapoalim Transactions from the Commissioner of Taxation and from the liquidators.

290    The conduct said to fall within the scope of para 198 of the statement of claim was identified in the liquidators’ “breach note”. For each applicant, the conduct was described in a table under the heading “breach” as:

(1)    involving the relevant applicant (in the scheme);

(2)    continuing to involve the relevant applicant (in the scheme);

(3)    drawdowns and rollovers;

(4)    on-lending;

(5)    receiving and making payments;

(6)    lodging tax returns;

(7)    documenting the transaction in a particular way; and

(8)    concealing the deposit as security so as to conceal the offshore funds and offshore income.

291    As the liquidators put their case in the “breach note”, breaches (1) and (2) are no more than conclusory descriptions of the conduct referred to in breaches (3) to (8). The case against the directors is not a case of accessorial liability, by which it is alleged that they were “involved” in a contravention by BCI: cf, for example, s 79 Corporations Act.

292    Any breach of duty will arise from particular acts or omissions on the part of the relevant director. If it were suggested, I would not accept that a director’s conduct “involving” BCI in the scheme, for example, by procuring a drawdown, will necessarily implicate him in some other act or omission that occurred in pursuance of the scheme. Accordingly, I have not considered whether particular acts or omissions, said to be breaches of duty, constituted “involving” or “continuing to involve” an applicant in the scheme.

293    Breaches (3) to (8) broadly describe conduct that, if undertaken, gave effect to, or was at least consistent with, the scheme that I have found. Taking BCI as an example, based on para 197 of the statement of claim, the alleged benefits of participation in the scheme to various of the respondents comprised: